Fund accounting system spend to hit $500 million by 2012

A new report by financial technology consultancy Aite Group, Portfolio accounting systems for hedge funds, evaluates five portfolio accounting systems on the market with at least 60 hedge fund clients: Advent Software's Geneva, Linedata Services' Beauchamp Hedge Fund Suite, SS&C Technologies' Advisor- Ware and Total Return, SunGard's Visual Portfolio Manager (VPM), and Tradar's Insight.

Report author Denise Valentine notes that all products evaluated are based on accounting capabilities, but also share a lack of support for derivatives valuations and advanced risk analytics functionality. So far, none of the products feature yield-curve or Monte Carlo analysis, parametric risk modelling, historical value-at-risk (VaR) analysis, portfolio simulation, or stress testing. However, Valentine anticipates these vendors making significant efforts to add such functionalities as their clients demand them.

The report explains that hedge funds' need for greater control of their operations has generally driven technology uptake in recent years; pressure from institutional investors, industry working groups, and regulators continues to push managers' technology adoption rates. Typically, Valentine writes, managers' proprietary application development focuses on trading and analytics, while they rely more often on third-party providers or counterparties for back-office operations.

"Hedge funds are also building bigger staffs to support infrastructure requirements, including the back office," writes Valentine. "Eliminating regulatory risk, reducing system maintenance, and eliminating key staff dependences are operational priorities for hedge funds."

As such, Valentine identifies several features portfolio accounting vendors will have to focus on in order to meet hedge fund clients' maturing requirements:

• Heightened sense of risk management

• Faster data flows

• Connectivity to a greater array of tools, counterparties, and systems

• Reporting capabilities on an instant, professional, and ad-hoc basis

These high-level issues will translate into specific components such as risk analytics, valuation modelling, stock lending, collateral management, and enhanced reconciliation and processing capabilities for over-the-counter derivatives that vendors' development teams will likely pursue.

The report anticipates an annual growth rate of nearly six percent for the hedge fund portfolio accounting market over the next four years. Aite attributes that growth to factors such as rollouts of ASP versions of these products, third-party white-labelling partnerships between vendors and hedge fund counterparties, new competition, and savvier buyers.

Valentine describes two types of vendors gaining traction among hedge funds: makers of portfolio accounting and management systems that began in the back office; and providers whose products initially targeted front-office functions such as valuation modelling, analytics, and derivatives processing, and have subsequently moved toward the middle and back office.

Even among hedge funds historically relying on their fund administrators for accounting support, some managers are implementing separate accounting systems in order to "shadow" their counterparties, according to the report.

Valentine points out that ASP deployments have proven especially conducive to greater hedge fund uptake of these systems, due to more modest costs compared with installing accounting systems in-house.

Each of the five vendors assessed in the report (Advent, Linedata, SS&C, SunGard, Tradar) have been operating for more than 10 years, and has attracted hedge funds, prime brokers, and administrators as clients.

Client breakdowns in terms of geography vary considerably among the providers: SunGard, SS&C and Advent's clients are based predominantly in North America, while Linedata and Tradar operate primarily in Europe, with smaller presences in Asia and Australia.

All vendors evaluated except Tradar have made ASP versions of their accounting products available either directly or through partnerships. Linedata and SS&C report 10% and 2% respectively of their customers as ASP users. Both SunGard and Advent have partnered with hedge fund technology provider Paladyne Systems to offer VPM and Geneva as hosted products for Paladyne hedge fund and administrator clients.

As participation in listed and OTC derivatives markets has taken off (current credit meltdowns notwithstanding), all the vendors Aite Group assessed have begun adding functions to their products to better support processing of these complex asset types.

"Vendors may find that clients require improved connectivity to a wider range of market data providers, independent valuation providers, and to third-party technology vendors that support data and the post-trade/pre-settlement environment," Valentine writes.

All vendors claim the ability to support instruments such as credit derivatives, asset and interest rate swaps, collateralised debt and mortgage obligations, and equity derivatives, directly on their accounting systems or, in SS&C's case, through additional products available. >