Hedge Funds and the Case for Custom Software Development

December 1st, 2009
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Contributed by: Natalie Kaminski, FinCode Solutions
Long gone are days when hedge funds could rely solely on custom software development for their process automation and productivity enhancement needs. Today the market is saturated with packaged software solutions that provide a wide variety of functions that support the front, the middle and the back office operations of hedge funds, funds of funds, and family offices. Some of the vendors are so successful that they have shaped the way funds use technology and have created new ways of trading, modeling, sharing information and communicating with investors. Even so, many managers, when faced with the need to automate processes, consider the “old-fashioned” way of developing a proprietary solution. This article examines the main advantages of custom software development.

First and foremost, building custom software ensures that the fund will be able to keep and further enhance their unique business processes as opposed to modifying business processes to match a packaged solution. This is especially important in today’s market as managers try to gain alpha and attract investment capital by coming up with unique investment strategies.

Another advantage of custom software development is better cost management. While many think that custom applications are more expensive than packaged solutions, it is rarely the case. There are a number of factors that make custom solutions more cost effective.

First, with a custom solution you can only develop features that you need, and not have to pay for those that you do not require. When built properly, a custom system will be able to scale and grow with your business and new features can be added over time. This “phased” development approach is more cost-effective, produces faster ROI, and is not possible with packaged solutions.

Second, there are no recurring licensing fees, and you may have as many users as you want run and use the system for the same price. Packaged solutions always come with annual licensing renewal fees, expensive support contracts and very high customization costs.

Third, the cost and the amount of training required is reduced significantly by having your key end-users participate in the design and development processes. This ensures that when the system is ready, users are familiar with the system and know exactly how to use it. Further, including your staff in the development process and actively seeking their feedback helps the change management process by gradual introduction to the new system.

Another aspect that many tend to overlook when comparing custom software to packaged solution is quality. Development of a custom software system requires that a full software development lifecycle be executed. This includes careful analysis and design and quality assurance measures throughout the project. Because there is only one client, every step of the development lifecycle can and should be tailored to specific requirements of the client. This makes the quality assurance procedures more precise and results in greater overall quality of the end-product. Delivery deadlines are also less strict and can be prolonged in an event of last-minute issue discovery, so the system does not go live with a long list of known issues as is often the case with packaged solutions.

Natalie Kaminski is the Founder and CEO of FinCode Solutions, a boutique software development and consulting firm that focuses on the alternative investment industry. For more information on Ms. Kaminski and FinCode Solutions, please click here.
Related Article Tags: Multi-Strategy, Long Short, Equity, Debt and Global Macro Hedge Fund News; Featured Reports; Hedge Fund Resources and Featured Partner News

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