Systematic hedge funds are experiencing shifts in how they source and develop their front-office technology stacks, with outsourcing beginning to increase, according to new findings from Acuiti.
Historically, systematic hedge funds placed high value on the development of trading strategies in-house, as this was used as a means to differentiate themselves from competitors.
Hedge funds have often in the past preferred to avoid using third parties to build technology, primarily to protect their intellectual property and retain control of troubleshooting capabilities in cases where systems malfunction – a mindset that is still prevalent in the industry.
The study, which was produced in partnership with Broadridge, found however that systematic hedge funds were shifting away from historical methods used to source and develop their front-office technology stacks.
Acuiti’s research, which surveyed 50 systematic hedge funds, found that 58% of firms are already combining outsourced strategies and in-house development to build their front office technology.
The survey found that the main deciding factor that influenced hedge funds’ decision to outsource or develop front-office technology inhouse was latency. According to Acuiti, firms which considered latency to be critical to their trading strategies were far more likely to develop technology in-house.
The most likely front-office functions that funds were outsourcing were found to be execution management systems (EMS), market data feeds and front-end trading screens.
Buy-and-build platforms were also found to be emerging as a new alternative to choosing between off-the-shelf solutions and in-house development.
Another key finding from Acuiti’s research was that sourcing skilled staff and raising initial funding have become the biggest challenges for starting a new fund, based on feedback from respondents.
“These findings show that space is opening up in the front-office for systematic hedge funds to diversify their technology stack,” said Ross Lancaster, head of research at Acuiti.
“This could provide a new route for funds, especially those just starting up, that need to prioritise cost efficiency without giving away IP.”
The full report can be accessed here.