If any class of financial-services firm should have become extinct in 2008, it's the hedge fund. Hedge funds bled $154 billion in 2008, according to Lipper Hedgeworld, with 1,500 hedge funds closing shop, as reported by The New York Times.
Amazingly, however, 659 new hedge funds launched amid this financial bloodbath, and these new hedge funds are looking to build high-performance trading platforms on the cheap, a trend that bodes well for Marketcetera.
Hedge funds need to save money. Who knew?
It's important to remember that today's aren't yesterday's spendthrift hedge funds. I spent the morning with a friend who left a large financial-services firm to join a small, $250 million hedge fund in June. He represents a new demographic in the hedge fund world, one that cares about fund performance and cutting fund costs.
A lot of hedge funds still in business saw their top traders leave when the economy imploded, only to set up new funds. These new independents couldn't make money at the old firms because their performance was so underwater, it would take years to get back enough in positive gains to start cashing in on performance fees. Meanwhile, fund sizes under management began shrinking, with redemptions and fees getting slashed in the process.
This means a new breed of leaner hedge fund is rising, hedge funds that arguably could spend lavish sums on trading platforms but learned enough from the market implosion to save money wherever possible.
Marketcetera fills this need, particularly now, with its hosted offering. I've covered the company before but continue to be impressed by its speed of innovation.
The company launched Marketcetera 1.0 in January 2009, then hit version 1.5 in April 2009 (adding support for multiple traders and some key data feeds and real-time analytics), and now, in June 2009, the company's open-source trading platform is sitting on the NYSE's high-performance cloud.
Pretty impressive.
Equally impressive is where the company expects to take open source next, as can be seen in this YouTube video. The proprietary-software industry serving hedge funds and other financial services companies just got a wake-up call.
Follow me on Twitter @mjasay. Perhaps if enough people follow me, I'll be able to afford to lose an investment in a hedge fund.
This week Marketcetera announced general availability of its Marketcetera Automated Trading Platform, an open-source platform for hedge fund traders. I wrote last week about Marketcetera's seemingly odd timing, creating a trading platform for hedge funds just as they've fallen off a financial cliff.
But in talking further with Marketcetera's Roy Agostino, chief marketing officer, and Graham Miller, chief executive officer, I'm increasingly inclined to believe that the company couldn't have timed its market entry more perfectly.
Consider that the company's Web traffic is up over 300 percent since January 2008, suggesting growing interest in the company's products. More important to revenue, however, is the statistic that registrations (for white papers, etc.) are up over 400 percent year over year. These are people that have more than a passing interest in Marketcetera. They're potential buyers.
I asked the Marketcetera executive team what is driving the interest in its open-source trading platform, and heard three themes that resonate across the open-source spectrum:
- Total cost of ownership. Hedge funds and the other large financial institutions are trying to drive down their costs, especially in the wake of the biggest financial meltdown since the Great Depression;
- Vendor lock-in. Agostino suggested that money managers are increasingly frustrated with being locked-in long-term to their Order Management System (OMS) vendors, especially when it's become common practice to demand hefty professional services fees just to make the proprietary OMS suitable to a hedge funds day-to-day requirements;
- Control and flexibility. Hedge funds view technology as a competitive differentiator, and many have discovered that proprietary OMS offerings simply don't give the flexibility to tweak the OMS to fit their requirements. Hence, they have developed their own OMS in order to get the flexibility they want, but open source gives them the ability to start with a robust platform and fine-tune the last 10 percent or so of their requirements.
I've blogged about Marketcetera before, a cool open-source hedge fund trading platform. Later this week I'll be posting an update after I interview the Marketcetera team, but keep bumping into stories that make me wish the interview were today, not Thursday.
For example, Businessweek recently offered up an opinion piece from a San Francisco-based hedge fund trader, who argued for an open-source trading platform:
After headcount, a typical hedge fund's largest expense item is technology. Much of that expense goes to the trading systems that we use. Let me tell you a secret: Our "secret sauce" is our trading strategies--it's not our systems for trading. These platforms can cost even a smaller fund like mine hundreds of thousands or even millions of dollars a year. Look, I just need a trading platform that executes our strategies. The software needs to connect to other systems that our different brokers and exchanges use and complete the trades driven by our increasingly automated strategies. This trading platform market is probably a $1 billion annual industry today.
It's also exactly what Marketcetera already offers. Has the Marketcetera team called this guy? I'm hoping the answer is 'Yes.'
Computer Business Review recently went into detail on the Marketcetera trading platform, calling out its high download numbers and promise for the hedge fund industry. For those who think that hedge fund traders can afford to waste money on expensive, bloated systems, this article offers good reason to believe otherwise.
In this environment, no one can afford to waste money. It doesn't grow on trees or hedge fund trading desks. But I believe Marketcetera is well poised to help hedge funds trade more efficiently and, hence, make more money with fewer resources. Yes, even hedge funds need to do more with less.
I can't wait to talk with the team later this week.
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