June 11, 2007
In a business filled with complex trades and, often times, a high-risk, high-reward manner of doing business, the one place a hedge fund cannot afford to take risks is with the computing platform that supports its trading business. And after being pushed to the limits by legacy systems, it looks like more and more hedge funds are addressing this issue with grid computing.
With its homegrown distributed computing system being pushed to the limit by increasingly complex trades and a move into the credit derivatives space, III Offshore Advisors (III) is one fund for whom this rings true.
Tired of sending jobs to servers in the minimally managed server farm and "just kind of hoping it worked," III CTO Paul Algreen set out to find a grid solution that fit what his fund was looking to do. After taking looks at a few options -- both open source and proprietary -- Algreen and his team found most to be either too big of projects, too expensive or, in the case of the open source Alchemi middleware, not adequately supported or developed. However, after engaging Digipede on the advice of an acquaintance in the hedge fund business who had dealt with similar issues, III found its solution.
Chosen by III for its ease-of-use, as well as for its relatively low cost (substantially less than the six-figure-per-year costs of some competitors), Algreen describes the Digipede Network as "almost elegant" in its simplicity. In fact, he noted, while developers struggled to get other solutions up and running after two weeks working on them, Algreen himself (an admittedly mediocre programmer) had the Digipede solution working in less than a day. When the fund's full-time developers had at it, the Digipede-enabled platform was running robustly in short order. This was an ideal situation because, as Algreen says, "We don't need a lot of fancy management, we don't need a lot of fancy failover. We just need to run a lot of risk."
Since implementing its grid in February, III has stuck with its concept of simplicity, only using the grid for a subsection -- mainly complex stuff -- of its overall risk analyses. One area where it has been particularly beneficial, said Algreen, is in speeding the analysis of certain everyday core scenarios that were pushing deadline limits, thus enabling deeper look into the trades. "The traders and analysts love it," he says, "because now they can go out and define 'What happens to my portfolio if this happens?' whereas before we were just hoping we'd get through 'What's my core risk?' "
Looking forward, though, III and its parent company, AVM LP, are considering more advanced uses of the grid technology, including commoditizing it and offering it as a service to customers. Some of AVM's customers, said Algreen, have been asking for risk analysis services, and a grid-powered portal would allow them to run risk scenarios on their own. Of course, the bottom line always is a consideration and, on top of expanding the services available to customers, Algreen believes this portal could be a nice source of revenue.
For its part, Digipede counts III as just another among its growing list of hedge fund customers. Having signed up a few more customers in this market within the last couple of months alone, Digipede President and CEO John Powers credits the ease-of-implementation of his company's product with a lot of its success. "There are very few hedge funds that have any sort of grid in place," he said, "and now they're finding that it's quite straightforward to do with our software."
According to Powers, Digipede is seeing customers adapt their applications to the grid by changing only 20-30 lines of code, which was the case with III, and getting applications online more quickly means seeing results faster. In fact, said Powers, after seeing how easy it can be to get results from a grid platform, a couple of recent hedge fund customers have come back to purchase more agents, or licensed nodes, within a few months of putting their grids into production.
Based on this recent success with hedge funds, and in the financial services market in general, Digipede expects to gain even more traction as it aligns with more partners and unrolls new capabilities in upcoming software releases. As Powers sees it, "It's basically an arms race among the traders right now to be able to build stuff that enables them to price more accurately and identify trading opportunities faster than their competitors."
With this metric in mind, III's Algreen says that making the move to a grid platform is paying big dividends. It is very important, he says, for a hedge fund to remain in balance and to be able to maintain its hedges and fully understand its risks. Additionally, he explained, although III is a pretty big player in its space, it is a relatively small company, and problems with systems not being able to quantify risks affect everybody -- not just the IT staff.
"Any time that the [quantitative analysts] and traders spend troubleshooting system errors or troubleshooting risk or helping us to optimize risk is time very poorly spent," said Algreen, adding that their time is much better spent coming up with trade ideas, conducting research and, essentially, figuring out ways to generate more money. When they're allowed to focus on these activities, as Algreen says they have been since deploying the grid, the return on investment can be astronomical. In fact, he said, freeing up the time of the traders and analysts probably has resulted in "countless" trade opportunities that helped pay for III's Digipede installation in the first couple of days.
Said Algreen: "It has definitely already paid for itself."
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