European politicians have long been hostile to hedge funds.  In 2007, the German Vice Chancellor Franz Müntefering famously branded them ‘financial locusts’.  Prior to his election, French President Nicolas Sarkozy described them as “predators” that “create zero wealth,” and proposed punitive taxes on ‘speculative’ transactions.

Their objections are probably rooted in the fact that hedge fund activities are perceived as largely unregulated, and therefore outside the control of politicians and bureaucrats.  The fact that 80% of European hedge funds are based in London, not Paris or Frankfurt, has only added to their antipathy.

The financial crisis that took hold in 2008 gave these politicians the perfect opportunity for a regulatory crackdown, with hedge funds a convenient scapegoat – even though several studies have concluded that banks, not hedge funds, were most guilty of excessive leverage and risk.

The result was AIFM – the proposed directive on Alternative Investment Fund Managers.  The wheels of European regulation grind slowly, but finally we are approaching the stage where legislation may be enacted – although even now there are complications: two separate drafts of the directive have been proposed by the European Parliament and the European Council, and they are now trying to come up with a single version.

Under the AIFM proposals, hedge funds managers based in EU countries would be subject to quite onerous new capital and reporting requirements.  The rules are based on the domicile of the managers, so basing the funds themselves in Cayman or other offshore havens provides no exemption.

What is more, the ripples will be felt much more widely, because managers from ‘3rd Countries’ outside the EU, which includes USA, are supposed to comply with certain provisions before they can market themselves to EU investors.  US Treasury Secretary Geithner has been forceful in expressing his concerns, and some watering down seems likely.

Some hedge fund managers have looked to avoid the AIFM provisions by offering their hedge funds under a regulated UCITS structure – the so-called ‘NewCITS’ approach that was supposed to provide hedge fund returns, but with higher levels investor protection.

However, the consensus is that NewCITS funds have yet to be stress-tested, and many doubt their ability to deliver on the investor liquidity requirements when the going gets tough.  The amount of new money they have attracted has so far fallen short of their early promise, so they are no proven silver bullet.

Either way, it seems the financial crisis has played into the hands of regulation-hungry Eurocrats.  Whether this proves to be in the long-term interests of investors is another matter, as the regulations come with a significant cost burden.  Singapore and other locations will be rubbing their hands.

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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And, no this question has nothing to do with the current subprime crisis or the housing problem. Nor does it require wearing a hard hat to work, although it could perhaps protect one’s head from the bumps and bruises we experience in our industry.

What I would really like to understand is what makes a firm become a software builder vs. a software buyer? We get faced with the eternal “Buy vs. Build” decision in the financial technology industry on a daily basis, and while we are a biased party in this conundrum, there is still a sensible resolution to this dilemma, one in which, all parties can be happy with their choices.

Building proprietary systems that are commoditized makes no business sense. Buy-side institutions are in the business of making money for their investors by any legal means possible, but that should not mean getting into the core software development business in the process. Such software development in the financial industry is a cost center and like any other overhead has to be reduced. It of course makes sense to invest in building software that actually lies within the core investment competency of a firm, but it is plainly futile to build technology that merely reinvents the wheel. Many times an investment firm embarks on building (or should I say reinventing) a technology platform with the intention of being selective and prudent, but gets carried away, thinking that it won’t incrementally cost much more to build the rest of the standard parts of the infrastructure. This thinking is very shortsighted, and while, initially it may indeed cost less, in the long run the cost of maintenance will dwarf all the initial development outlays. In many ways, as this system matures and becomes more mission critical, it begins to act like a living organism consuming more and more resources.

It is perfectly acceptable to build trading algorithms, valuation models, analytical projections, but why build a portfolio management, accounting or risk system? Why spend money on data reference or data warehouse platforms?

Sometimes when going down the build path an IT department is out to prove that it can do it better than a vendor but such bravado should not drive the business. Instead a cooler “ROI” based approach should prevail. It is not about whether a better mousetrap can be built but rather how much will it cost to build and maintain over its lifetime? There are obviously many temptations in favor of building and owning your own software including: if you build it you can always modify it at a moment’s notice; you will be intimately familiar with its inner workings to change its behavior; you can quickly build another piece that sits on top of the existing data; you can do all this while being completely in control without depending on someone else to do it for you. All of these seemingly positive arguments, however, can be turned into disadvantages if we take a more business like approach.

The first question in discussing new software application development should not be “Can you build this thing?” but rather “How much of this thing can you buy?” Only if the answer is no to buying should an organization consider embarking on the path to building its own software. I have been in the same situation as the CTO of a large hedge fund.  Back then we were forced to build because there was no solution that could be bought (luckily we were fortunate enough to be able to commercialize our investment – our solution later became the basis for Paladyne). Thankfully, times are now different and most of the standard applications are widely available. These new breed of products are not only built and maintained with the latest technology but are also highly customizable to suit the ever-changing needs of the business.  It is also possible to build minor components around them to fill very specific proprietary needs. But best of all, there is someone on the other end of the equation, whose sole job and business function, it is to maintain and design new functionality for these products.

So next time your organization ponders the buy versus build question, first begin by ensuring that your firm has in place the correct architecture. Ideally it should be a flexible service-oriented architecture (SOA). This plug and play infrastructure will allow you to complete the puzzle of your infrastructure by selecting which pieces to build and which to buy.  Once this is in place you then need to do a thorough evaluation of what applications are out there. What has already been built that fits the need exactly or likely gets you 80% there?  Can this, remaining 20% of functionality be either overcome, or built around? Finally, remember that a buy-side organization can always build technology but your investors would rather have you concentrate on making money for them.  There may be occasions that building software is directly tied to these money-making activities but for most firms this is rarely the case….

Sol Zlotchenko joined Paladyne in July 2005 as the CTO. He is responsible for all aspects of technology operations including development and product management for the complete suite of Paladyne products. He manages both local and overseas development teams and has played a key role in building Paladyne’s ASP service offering. Prior to Paladyne Mr. Zlotchenko was the Head of Development at Alexandra Investment Management, a multi-billion dollar, multi-strategy hedge fund. During his tenure at Alexandra Investment Management, Mr. Zlotchenko guided the company through tremendous growth, investment strategy diversification, and explosive technology infrastructure development. Moreover, he led development of numerous proprietary applications and third-party integration products covering trading, risk management, operations, accounting, and investor relations.  Mr. Zlotchenko has extensive experience in financial services industry including a position at Goldman Sachs where he worked in various roles across multiple technology divisions. He received his BS and MS degrees in electrical engineering from Columbia University.


Being from the software industry does, sometimes, spark interesting conversations at parties, but most of them recently have revolved around the next “killer” iPhone application or the next gadget that will “revolutionize” our households. There are occasions, however, that discussions move into something that is intriguing and thought-provoking. Recently I was asked the following question: “What is the most successful business application ever created?” This question really piqued my interest but I didn’t have to think for too long, I quickly answered that there is no contest, and that Microsoft Excel should, hands down, win an Oscar in this category. This opinion was debated a little. Microsoft Outlook, a few different browsers, Google, various word processors, and even a plain old database were mentioned, but in the end everyone quickly agreed that Excel is indeed the king.

The reason why I had such a quick response to the question is because we compete with Excel on a daily basis. Besides being the most successful business application of all time, it is an ultimate standard for usability and value-add for any software product in the financial industry. I cannot count how many times over the years that we have walked into a company to sell our products only to be met with the same basic objection: “I have this spreadsheet that I’ve used for the past 15 years.  It is my whole world and I can’t live without it. ” In other words the sale very often came down to one simple question “Can you beat the sheet?”

What’s interesting is that recently we are finding more and more firms that understand the danger of being completely dependent on spreadsheets and are now actively looking for alternatives. To me this is unprecedented because traditionally I have found myself swimming upstream trying to explain the downside of running a business on Microsoft Excel spreadsheets. This change in mindset has resulted in the central question shifting from “Can you beat the sheet?” to “How can you beat the sheet?” The addition of this one word “How” – to the question appears to be the result of the intensifying drumbeat from investors, regulators and, indeed the general public, demanding greater hedge fund transparency and accountability.    Hedge funds have finally realized that Excel spreadsheets cannot lead the way in the enterprise.

As I think about the sheet more and more, I realize that my own opinion has changed and become more nuanced over the years.  In fact I would now argue that it is not possible to completely replace the sheet.  In some ways we should follow the old adage — “if you can’t beat them join them”.  We all must come to terms with the fact that Excel will always be part of the enterprise’s infrastructure.  The real change must be that mission critical functions can no longer be dependent on Excel.  Buy-side firm must now listen to outside forces and remove Excel from where it is not suitable.  Software vendors on the other hand must build solutions that not only can take over these mission critical tasks but that can also co-exist with Excel.

Sol Zlotchenko joined Paladyne in July 2005 as the CTO. He is responsible for all aspects of technology operations including development and product management for the complete suite of Paladyne products. He manages both local and overseas development teams and has played a key role in building Paladyne’s ASP service offering. Prior to Paladyne Mr. Zlotchenko was the Head of Development at Alexandra Investment Management, a multi-billion dollar, multi-strategy hedge fund. During his tenure at Alexandra Investment Management, Mr. Zlotchenko guided the company through tremendous growth, investment strategy diversification, and explosive technology infrastructure development. Moreover, he led development of numerous proprietary applications and third-party integration products covering trading, risk management, operations, accounting, and investor relations.  Mr. Zlotchenko has extensive experience in financial services industry including a position at Goldman Sachs where he worked in various roles across multiple technology divisions. He received his BS and MS degrees in electrical engineering from Columbia University.


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.