5 principles for choosing the best hedge fund software

10 mins read

One of the crucial tools for running a successful, modern-day hedge fund is software. We’re no longer in the era where many trading processes were done via paper and phone calls. Right now, not having software to handle those processes quickly and effectively puts any hedge fund at a disadvantage in its peer group.

Picking the best software program for a hedge fund isn’t the type of decision made on a whim. Many considerations have to be taken into account and trade-offs made so that you pick what best suits your needs even though it isn’t perfect.

There are different software tools to handle various processes required in running a hedge fund. For example, there are dedicated analytical software, accounting software, compliance software, trading software, and the likes, and picking the best software for each process is important. More so, certain software tools combine the function of many processes into one to make running a hedge fund much easier and smoother to handle. You just need to make the right choice.

The key considerations when picking hedge fund software include;

  1. Cost

First and foremost, knowing the cost of the software that you’ll pick is paramount. The type of complex, tool-heavy software needed to organize a hedge fund doesn’t usually come cheap. Some are expensive to the tune of several thousand dollars each month, but some are much cheaper than that, though often with fewer capabilities.

Having an accurate view of how much you’re willing to pay for software will do you good. It isn’t a must to use the most complex and expensive software when you’re starting up and still have a small budget. You can start with the smaller packages and upgrade if your fund grows bigger.

There should be a firm agreement on the software costs your fund will be able to absorb. For newer funds, the budget will likely be smaller than that of more established funds, and there’s nothing wrong with it. Though we’ll advise newer funds to go for the cheaper solutions, you shouldn’t be so cheap with your software budget and risk getting substandard software, there should be a balance.

  1. Functionality

You must consider the distinct software functionalities, as every fund doesn’t require every type of software feature. For example, a quant hedge fund will rely more on mathematical and analytical tools compared to a normal fund. Therefore, you must take note of the functionalities that your fund would require and work to find software that fits them best.

For hedge funds, some important functionalities to be considered include;

  • Support for various asset classes: There are many asset classes that hedge funds trade, ranging from the simple ones like stocks and bonds all the way to complex derivatives such as futures contracts and share swaps. It’s important nowadays for the trading software used by hedge funds to support as many asset classes as possible.
  • Globality: Traders may not want to be restricted to trading in just one country when there are opportunities in many other countries. Having access to global markets is a key consideration for many hedge funds when they pick their software.
  • Integration between front and back-office: Modern hedge funds require a good flow of information between their “front office” and “back office”. The front office refers to personnel that directly drive revenue, e.g. the traders and fund managers, while the back office refers to supporting roles for the front office to effectively do their jobs. It’s important that there’s a good flow of information between both office silos baked into the software that a hedge fund will use in order to make running it very efficient.
  • Compliance: Running a hedge fund demands succinct compliance with lots of laws and regulations, and the software used by a fund must help with compliance. In this case, reputation matters greatly as certain software tools are usually favored by funds to ensure they comply with regulations.
  • Algorithmic trading: Many hedge funds dabble in algorithmic trading, which entails executing trades automatically on pre-programmed instructions accounting for variables such as price, time, and volatility. In fact, it’s estimated that algorithmic trading makes up between 60-73% of all US equity trading so we can deduce there’s heavy demand for software allowing it. One example of software that supports algorithmic trading is MetaTrader 5 for hedge funds.
  • Cross-Platform Compatibility: Many hedge funds demand that the software they use be compatible with many platforms, e.g. both PC and mobile so that their staff would have no problem working together even when they’re using different types of gadgets. It’s important to choose software that supports this cross-platform compatibility.
  1. Cybersecurity

It’s so that if you want to lay bare the intricacies of a successful hedge fund, access its software suite. The software tools used by any fund can tell a whole lot about its operation and divulge much information that’s usually kept secret. Because of this, having strong digital security is non-negotiable.

When choosing software for a fund, pick the choice that has strong security and minimal vulnerability to malicious activity from external actors. You definitely don’t want your fund hacked and the confidential information about it spilled into the public’s ear.

  1. Ease-of-Use (UI)

It’s good that a software package has many useful features but it’s even better that its users are able to navigate the many features with ease. Using software with a clunky, complicated user interface is a pain. It’s not just inconvenient to use but also drains the productivity of its users, the staff of a hedge fund in this case. You’ll surely want your fund to have excellent productivity and a good way to ensure that is picking software that’s as easy as possible to navigate despite having complex features.

  1. Vendor Reputation

The reputation of a software vendor matters very much when you want to use their products. You surely don’t want to use a tool that frequently breaks with little support and causes problems. There’s a significant operational risk when choosing the software a hedge fund uses, so you must aptly consider vendor reputation.

The critical reputation factors to consider include;

  • Customer support: There should be solid customer support if you run into any issues that you can’t solve on your own.
  • Globality: Even when some vendors offer customer support, it’s not always running for 24 hours and there may be times when you crucially need their help but can’t get it, so choose wisely.
  • Release of new features: You have to consider if the vendor regularly updates their software with new features so that your fund doesn’t get left behind compared to its peers in the latest software functionalities that make their work easier.

There are many more considerations that we may not have listed here. Still, you should get the basis for why it’s important not to rush the decision to pick software for a hedge fund but rather take time to make calculated decisions with many considerations. Once these considerations are taken, you can begin your search for the software to pick. The best ways to source software vendors include referral by peers in the industry or checking out online catalogs.

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