Technology and Alpha Potential

What is Alpha Potential?

People in the financial services industry, especially in the hedge fund space, are always looking for new and profitable trades. However, with large quantities of data available to more players than ever before, the challenge of find an ‘edge’ is greater than ever. This challenge reaches back from the analysts into the IT department, as the work is completely dependent on a firm’s ability to not only crunch data in less and less time, but access large amounts of it readily.

In my recent HFM webinar with Google Cloud, Google’s Leonard Law discussed five major challenges facing the industry. These were:

  1. To make sense of exploding data volumes
  2. Narrowing margins due to increasing competitive pressures
  3. Attract and retain talent
  4. Managing complexity caused by both regulation and security threats
  5. Driving business innovation and agility

And, yes, as you’ve most of you have heard, the cloud offers significant benefits to overcome these. While financial institutions are adopting cloud for different reasons, clearly one of the biggest driving forces is the ability to remain competitive. If you aren’t able to compete, not much else matters.

Our own survey last year supported this, as more than two-thirds of respondents felt the demand for risk-analysis jobs would increase over the next two years. No one thought these would decrease. The twenty-two percent that thought they would not change — it’s unclear — maybe these are the innovative leaders who already are ahead of the game.

Risk Analysis in Finance - Increased Demand on Technology for Alpha

Technology as It Relates to Alpha

Funds measure success in alpha potential. Alpha is the active return on investment for a given transaction. It gauges the performance of a fund relative to the return of a benchmark index, such as DIJA or S&P 500. When we refer to alpha throughput, we’re referring to a firm’s gains relative to their investment in technology used to achieve it.

Being able to leverage technology for analytic workloads in hedge fund environment should be able to increase this alpha throughput by 25% or more. Being able to increase this throughput is a must to remain competitive.

With technology in place, which is discussed in the webinar and will be recapped in a later blog post, hedge fund IT and analysts should be working together toward the development of better ways to improve their throughput rates. Firms will want to:

  1. Increase alpha potential and limit risk
    1. Run more workloads in less time in the same storage footprint
    2. Optimize workload location based on its business value, not framework or configuration.
    3. Complement and extend existing physical infrastructure by using one or more public clouds, basing decision on price/performance
  2. Optimize physical infrastructure to reflect competitive advantage
    1. By accelerating access to data and making access available to larger numbers of concurrent assets
    2. By moving lower priority workloads to either low-priority assets or to public clouds
  3. Increase flexibility by limiting data gravity
    1. Make data available to compute environments where they may be, even in the cloud
    2. Store data where it makes the most regulatory and competitive sense; let your business dictate where your data lives

As you’d imagine, the greater the analytic throughput, the greater the decision-making capacity. The goal with this approach is to take the data location issue off the table. When you gain flexibility in its location, strategies can be formed to leverage both cloud and local resources to design workflows that keep your business in the game.