An Objective Look at IT Solutions for Hedge Fund Operations

1. An Objective Look at IT Solutions for Hedge Fund Operations John T. Vaughan, CEO, MarketDataInsite December 3, 2004

2. Industry Overview “As the hedge fund market heats up, hedge funds are looking to technology to maintain their competitive edge” “…hedge funds will by and large avoid building these solutions in-house, however. Most solutions built in-house simply do not offer the competitive advantages of those built by professional technology vendors.” --”A Cottage Industry Goes Mainstream: Hedge Fund Technology in the Spotlight”, Celent Communications, April 21, 2004 ©MarketDataInsite 2004 All Rights Reserved

3. Hedge Fund Industry Choices The operating style of successful hedge funds is organize technology to serve the proprietary needs of the asset management function and to spend minimal time and money on technology for support functions. The choice between installed and “on demand” computing seems to favor “on demand” services for support functions. ©MarketDataInsite 2004 All Rights Reserved

4. Division of Functions Proprietary and installed technology tend to support trading, settlement, analytics, customer reporting, compliance, risk management, financial reporting. Functions like vendor expense management, commission and soft dollar tracking, payroll and employee benefits are candidates for “on demand services” ©MarketDataInsite 2004 All Rights Reserved

5. On Demand Expense Management Opportunities Each Vendor Creates a New Challenge to Your Time and Budget • Back-office Challenges of Managing Vendors • Non-uniform contract terms • Hard to reconcile invoices • Difficult to monitor requisition processes • Need to allocate costs • Blurs cost transparency for users, groups of users, firm • Makes it difficult to set budget • Difficult to identify successes/failures of different spend strategy ©MarketDataInsite 2004 All Rights Reserved

6. Hedge Fund Technology Case Study #1 Organizational Overview • Large hedge fund (over 150 traders and 4 locations) • Several billion in assets under management • Information Technology Department based out of central location • Large soft dollar user • Moving away from soft dollar dependency • Have been able to save significant costs through proper implementation of technology ©MarketDataInsite 2004 All Rights Reserved

7. Hedge Fund Technology Case Study #1 Had Specific Goals to achieve cost transparency • Challenge • Lots of paper work making invoice reconciliation and paying bills manual and time consuming • Accounting and Information used different software to manage technology administrating making it difficult to streamline vendor management • Vendor bills were fluctuating more than usual making it difficult to verify costs • Costs were loosely allocated across firm instead of correctly allocated blurring cost transparency • No knowledge of contract benchmark prices • Wanted to reduce expenses • Overwhelming for the one administrator responsible for IT function • Solution • Implement a customized database to provide a centralized location for all departments to manage and administrate vendors • Result • Established a central point of input for all vendor management and administration for both accounting and IT • Set rules & parameters for cost allocations to identify truer cost of a user, business unit and/or vendor • Were able to allocate bills directly to appropriate cost center or user • Received refunds from over billing • Automated tools to track changes in market data environment and their expected billing ramifications • Dramatically reduced administrator’s time and eliminated paperwork ©MarketDataInsite 2004 All Rights Reserved

8. Case Study Example 1: Former Business Process Exhibit #2 Payment accepted Bills are sent in-house or to soft dollar broker Firm must manually allocate costs and reconcile invoices Hedge Fund Tasks Delegated General Ledger/Accounts Payable Soft dollar Broker A Audit Dow Jones Soft dollar Broker A Reconcile Bloomberg Soft dollar Broker D Soft dollar Broker D Allocate Reuters ACCOUNTING Dept. Upload allocation to GL system and pay invoice Vendors unable to supply invoices electronically Hedge Fund Hedge Fund Upload and Notify Time-intensive, prone to manual error, blurs cost transparency ©MarketDataInsite 2004 All Rights Reserved

9. Case Study Example 1: New Process Exhibit #2 Customized HedgeSpend database to match org structure and allocations Hedge Fund MarketDataInsite HedgeSpend 3000 IT Dept. Review Invoices paid using HedgeSpend 3000 application Audit Dow Jones Reconcile Bloomberg Allocate Reuters ACCOUNTING Dept. Upload allocation to GL system and pay invoice Vendors unable to supply invoices electronically Upload and Notify ©MarketDataInsite 2004 All Rights Reserved

10. Hedge Fund Technology Case Study #2 Organizational Overview • Start-up hedge fund with aggressive growth strategy (5 traders -70 traders in six months) • Projected 4 locations within one year • Unclear about Information Technology budget • Prime broker to pay for some services but not all • Information Technology budget all hard dollars • Needed a plan of attack to make sure that the information technology, while not a priority, costs would remain minimal and cost effective • Stay away from “tiered” contracts that could penalize the firm as they grow ©MarketDataInsite 2004 All Rights Reserved

11. IT Trends “Continuing the age-old Wall Street tradition, many buy-side organizations are playing it pennywise and pound-foolish, spending less on technology and instead attempting to offset with people power. The primary problem here is not only do they spend more, these firms expose themselves to a human capital risk due to a critical shortage of qualified personnel” --CarbonBased Consulting, 20004 Buyside IT Spending and Trends ©MarketDataInsite 2004 All Rights Reserved