Deploying advanced OEMS tech to meet multi-strat challenges

February 12, 2024 | By: Iain Smith

While pod or platform-based multi-strategy hedge funds are proving an irresistible draw for both investors and portfolio managers, their diverse investment strategies and complex portfolios create multiple challenges best served by advanced OEMS technology.

The rise of multi-strategy hedge funds in recent years has been remarkable. In 2022 alone, data from HFR sized the multi-strategy hedge fund space at $890bn in assets under management, rapidly approaching and rivaling the $1tn equity fund hedge sector.

Consequently, with pure alpha as their primary objective and demonstrable growth to illustrate success, multi-strategy firms that use a pod or platform model are both a sought-after proposition for investors and a magnet to the brightest portfolio management talent.

Multi-strategy hedge fund challenges

From an operations and technology perspective, the rapid growth experienced by many multi-strategy funds combined with the diverse investment strategies and complex portfolios they manage creates multiple challenges.

For instance, pods that have been successful over time have often been given leeway to deploy asset class or strategy-specific technologies separate from the firm’s broader infrastructure. Further, new pods might need to be swiftly added to diversify risk and support new strategies as the business demands. However, adding a new asset class, such as options and futures, or moving to a strategy like pairs trading usually requires a specialized new trading solution.

Over time, this approach can create delays in executing strategy from a management level and, from an IT perspective, a dispersed systems architecture, which requires aggregation of positions to create a single overview for the firm’s management team to understand risk and overall performance, which is crucial for capital allocation.

Optimizing multi-strategy hedge fund operations with technology

Consequently, firms are looking for a single, scalable, cross-asset order and execution management system (OEMS) platform with exceptional trading capabilities, such as FlexONE, that can quickly deploy and handle new asset classes or strategies with sophisticated risk and compliance functionality to deliver management teams with a streamlined, centralized platform to control order and execution management.

By driving core order generation workflows centrally from an OEMS, management can slice and dice granular information to understand each pod’s individual performance and manage order allocation, fund splits, and tracking/centrebook strategies efficiently and transparently.

Reducing trading complexity between pods

Complexities can also arise from running strategies and trading the same names across multiple pods. Firms can use a modern OEMS solution with powerful APIs to provide sophisticated capabilities around order marking, locates, and internal crossing, which can significantly streamline the complexity of managing large volumes of trades across various diverse strategies.

For instance, pods can sometimes be trading the same instruments in different directions. Suppose an individual pod within the firm looks to short Apple stock. In that case, centralized order marking enables the tracking and management of orders at the chief investment officer or investment committee level to understand what is being held across different pods or at their prime brokers and the overall position.

Further, locates functionality native to a modern OEMS can ensure you have locates/inventory to go short in a particular stock or instrument. For example, FlexONE’s flexible, robust APIs can make seamlessly integrating a prime broker’s services a reality, meaning traders can request locates programmatically.

Additionally, using order marking and locates to gain a holistic overview of holdings, if you hold assets that a pod wants to buy and another pod seeks to sell, an internal cross can be made between pods at a management level within the firm, without the need to go to market. Filling the order with an internal cross means no market impact or need to pay commission fees on the street.

Running firmwide, unified risk and compliance – at speed

Multi-strategy hedge funds can carry a higher risk level due to their diverse, complex portfolios. Consequently, they need a comprehensive and robust risk and compliance framework to underpin the diverse nature of each pod’s strategy while ensuring that they adhere to the overall thresholds set out at a management level, safeguarding the fund’s capital, and ensuring investor confidence in its ability to manage risk effectively.

An OEMS with robust risk management capabilities allows the firm’s management committee to monitor and control risk exposure in real-time at the trader, PM, pod, strategy, or fund level. For instance, if a pod runs a systematic strategy, complex and detailed compliance checks across many granular rules can be automated to run at pod-level, firmwide, or across prime brokers. Further, a cutting-edge OEMS can offer other options to run compliance checks – whether in baskets, via GUI, or using a modern open-architecture OEMS over API.

The next generation of multi-strategy funds

By nature, multi-strategy hedge funds bring complexity. To operate as a successful multi-strategy hedge fund and generate high-quality risk-adjusted returns, you need excellent innovative pods and the technology tools that provide them with a competitive edge. A comprehensive OEMS with robust compliance, risk management, trading capabilities, centralized order marking, an automatic short locate system, high capacity, and powerful APIs are indispensable.

As the industry continues to evolve, hedge funds that embrace and leverage advanced OEMS technology will be better equipped to navigate the complexities of the financial markets and provide their investors with consistent, risk-adjusted returns.

This article first appeared in Hedgeweek’s Technology Report 2023 – Technology Report 2023 – Hedgeweek


Dan Enstedt, Head of FlexONE Sales, EMEA