Benefits of Combined OMS and PMS for Hedge Funds by Stuart Calder
Why can HFs benefit from a combined OMS / PMS solution?
While it is a popular myth that ‘all HFs trade all the time’, it is certainly true that many do trade much more actively than institutional managers, and are also more reactive to market events.
It is also the case that in many HFs, particularly the smaller ones, there is no separation between portfolio management and order execution. The manager making the investment decision, and the trader executing that decision, are frequently one and the same person.
For these reasons, HF managers need to keep a close eye on their portfolio whilst simultaneously tracking the status of their orders and executions in the market. A tightly-integrated solution that provides a consistent, real-time view across orders, executions, and positions, and can instantly generate orders directly from positions, has clear advantages over separate systems.
Recent market trends have further underlined the case for a unified solution. Many HF managers in Europe and Asia have re-packaged their funds to be compliant with UCITS regulations in order to attract or retain investors spooked by extreme market events in 2008/2009. (Although UCITS rules were developed in Europe, there is nothing to stop managers in other locations from running their funds by the same rules.)
UCITS rules have evolved over time so they now provide flexibility to adopt HF techniques such as shorting, leverage, and use of derivatives, but within a regulatory framework that places strict limits on exposures and concentrations. These rules have helped to convince many investors that UCITS funds can provided at least some of the enhanced returns promised by HFs, while providing more explicit and transparent risk management.
Moreover, even pure HF managers are anticipating a wave of regulation resulting from the political reaction to the financial crisis – still the subject of discussion as the EU Directive on Alternative Investment Fund Managers (AIFMs) continues its formulation process.
Compliance with investment rules can be achieved much more efficiently with pre-trade checks than post-trade analysis that may only identify breaches too late, and result in expensive corrective action (though post-trade is also necessary to deal with passive breaches as valuations fluctuate); and pre-trade compliance works most effectively within an integrated solution that gives direct access to the full portfolio – otherwise it risks being too slow while it waits for information from a separate system, or the checks may be run against outdated information.
In summary, tight integration of PMS, OMS, and pre-trade compliance provides clear advantages in a real-time environment where regulation is becoming more pervasive.
Stuart Calder is based in the UK and is global head of product management at Paladyne. Prior to this he spent over 4 years as a Product Director at Linedata Services, where he had global responsibility for the Beauchamp suite of products that focused on the alternative investment space. Stuart has been a frequent speaker at industry events, and a regulator contributor to trade publications in the asset management space.
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