Modeling the Future: How Systematic Hedge Funds Can Maximize Efficiency and Flexibility
By Dan Smalley, Head of Business Development, Itiviti, a Broadridge Business; Tom Williams, Head of Sales Engineering EMEA, Itiviti, a Broadridge Business; and Jason Lawrence, Head of Sales Engineering, Americas, Itiviti, a Broadridge Business
It’s not an understatement to say that this is a crucial moment for the hedge fund community.
In 2021, the world’s top 20 hedge funds by performance earned a record $65.4 billion for their clients, according to data from fund-of-funds firm LCH investments, overcoming pandemic-driven volatility, meme-stock frenzies and fragmented work environments. At the same time, they are facing a wide array of challenges, including accelerating markets, increasing regulation and a heightened need to diversify.
In this environment, access to the right trading platform is crucial – and that’s especially true for systematic hedge funds. Because these funds employ far more technical strategies than their discretionary counterparts, they typically have a wider range of solutions in place, including databases, pricing libraries, CEP engines and more, necessitating a highly flexible trading platform with a large capacity for integration. In addition, to operate at full efficiency, these funds must have the ability to not only identify the optimal trades, but to send them to market in an automated fashion.
Enter Tbricks, Broadridge/ Itiviti’s modular trading platform tailor-made for modern-day markets. With a flexible user interface, powerful built-in functionality, and a high degree of customizability, Tbricks delivers the transparency, control, flexibility, performance and reach required to efficiently navigate a complex market environment.
While Tbricks is not exclusively geared toward systematic hedge funds – many discretionary funds and other trading firms leverage the platform to great effect – we believe systematic funds represent a particularly compelling and relevant use case. Read along as we explore some of the most important prerequisites for success as a systematic hedge fund, and how Tbricks can help make them a reality.
Highly Sophisticated Mathematical Trading Strategies
Calculations and algorithms comprise the “systematic” element of systematic hedge funds, but too often, their trading platforms hamper capabilities in this area. It’s very rare to find a systematic fund that wants to use only off-the-shelf functionality, yet the monolithic platforms that have historically dominated this space have limited integrability with proprietary or third-party systems, making it difficult for funds to put their secret sauce to work.
Tbricks’ modular architecture contrasts sharply with these legacy systems. While clients build their algorithms within the Tbricks framework, we do not require everything to live on our system – instead, funds can keep things proprietary or maintain solutions from other vendors. At the same time, Tbricks can ingest large volumes of data, enabling a wide range of analytical capabilities, which funds are free to leverage for any purpose and augment with their own processes.
In this way, Tbricks can serve as a kind of hybrid solution, combining the rapid time to market of an off-the-shelf solution with the configurability of an in-house solution built from scratch.
Quantitative and Risk Calculations
To trade in a truly automated fashion, systematic hedge funds must have the ability to calculate risk with a high degree of accuracy and quickly make necessary adjustments. That’s a far cry from the current environment, in which many firms using legacy systems are forced to manually load in their positions each day. And even once this is done, analytical capabilities are often limited, with users unable to drill down to granular levels.
Tbricks delivers everything systematic hedge funds need to calculate trading risk in real time. Position monitoring functionality automatically syncs with trading, and users can easily run simulations to assess their strategies on an ongoing basis. In addition, while other systems enable calculations for single asset classes or positions, Tbricks enables the flexible aggregation of positions across the entire portfolio, enabling a heightened level of risk assessment.
Multi-Asset Pricing and Trading
Speaking of multi-asset functionality, the shift to multi-asset trading is a key trend among buy-side firms, and systematic hedge funds are no exception. The drivers go beyond the simple need to hedge and diversify – the electronification of various non-equity asset classes, the availability of data and the development of powerful cross-asset strategies are all factors that might cause a fund to reconsider their traditionally siloed approach to the markets.
Tbricks offers the functionality and flexibility to accommodate this dynamic, with tools extending across equities, ETFs, Fixed Income, FX and derivatives. That means systematic hedge funds can leverage a single point of access for all their trading, saving them from the tedium of context switching and the like. And what’s more, the platform’s modular architecture means it can work seamlessly alongside a wide variety of asset-class-specific tools, further enabling the shift to multi-asset.
Low-Latency Connectivity and Transparency
An inability to efficiently send orders to market can dull the effects of even the most powerful modeling and analysis. While speed is not necessarily a defining element of every systematic hedge fund’s strategy, it is a requirement for remaining competitive and maximizing performance, so low-latency connectivity is a must.
The Tbricks platform has been built with performance in mind, with direct market access (DMA) to major exchanges, often leveraging binary protocols or other low-latency methods. While the architecture contains numerous optimizations and shortcuts to ensure speed, we also deliver comprehensive transparency to clients, with detailed timestamps and real-time performance breakdowns, enabling them to make targeted and informed enhancements.
Regulatory Readiness and Agility
One additional benefit of Tbricks is its ability to adapt to an evolving regulatory landscape, an important priority across the buy side. New regulations often require funds to process and store extra information – in the case of MiFID II, for example, this involves short codes to identify algorithms and operating users, as well as new transaction IDs that could be attached to messages.
With Tbricks, data models are built to be extensible from the start, so incorporating additional data elements requires just a few clicks, not a wholesale re-architecture. This seamless responsiveness to regulatory change is yet another benefit of Broadridge/Itiviti’s modular approach.
The Road Ahead
Because of all these factors – robust integration with other systems, strong analytical and calculation capabilities, and low latency – Tbricks can play a crucial role in helping systematic hedge funds navigate an evolving market landscape. And with the continued electronification of workflows and asset classes, the growing multi-asset imperative and the ever-present possibility of new regulation, maintaining the near endless flexibility that Tbricks enables is essential.
The benefits of Tbricks go beyond the functionality of the platform itself. The Broadridge/Itiviti team combines vast industry expertise with a keen focus on client service, so users and firms are fully supported at every stage, from implementation to ongoing use. And with the firm being acquired by Broadridge last year, Itiviti is in an even better position to make continued optimizations and enhancements to Tbricks with the backing of a global fintech leader, especially when it comes to driving efficiencies across the front, middle and back office.
Bottom line: for systematic hedge funds, the road ahead is rife with both challenges and opportunities. Making the most of the opportunities will require a platform with the ideal combination of functionality, user-friendliness and flexibility – and through Tbricks, we stand ready to provide exactly that.