Joining the Dots

Jun 30, 2016 | HFMTechnology

The increasing regulatory scrutiny of hedge fund technology coupled with intense competition for executive talent means the need for hedge funds to consider their approach to tech recruitment has never been greater. Indeed, as service providers continue to innovate and non-hedge fund technology firms disrupt business models across financial services, the pool of technology talent on offer to funds at a senior level is dwindling, and the competition to attract executive staff beneath them is intensifying.

“It’s very competitive for technology talent at the moment,” says Jeanne Branthover, financial services partner at executive search firm DHR.

“Firms are paying more (for technology talent) and when they hire guys from firms that provide equity stakes they are having to pay for that as well, so compared to five years ago it has become much more competitive. The hot guys are hot everywhere so it’s harder to retain them and it’s harder to get them.”

Wedded to this is the nature of traditionally lean hedge funds, which are often low on head count, coupled with pressure to justify further allocation of a firm’s management fee to technology, a large line item cost.

Kate LeSaffre, vice-president of client management at recruitment firm Princeton Consulting, says there is a growing trend of smaller funds hiring emergent leaders, for example a senior technologist with considerable potential that can grow simultaneously with the fund, rather than appointing experienced CTOs.

Larger funds meanwhile are beefing up on the technology side, tapping into banks for experienced, top-level talent and investing more time and resource in technology recruitment in the middle and back office. “Larger institutional funds have been more receptive to reviewing and hiring skillsets that come from the investment banking world,” LeSaffre explains.

“However, small- to medium-sized funds search for candidates [that are] hands-on enough to understand and dig into things like code, but also strategic enough to see a vision. The challenge comes with finding a candidate not too far removed from the day to day, but also senior enough to really see opportunities and roadblocks from all angles and build a strategy with the team.”

At the crux of the debate is the stage at which a hedge fund decides to take on a CTO in-house and carve out that responsibility from the COO. At smaller firms, an operations chief will often have responsibility for technology up to a certain point. “When firms become more forward-looking and recognize the gap between reacting to the portfolio managers and planning ahead on technology, that is the sweet spot when a fund usually hires a CTO,” explains Nikhil Sudan, former COO of ADA Investments.

The question of when to hire a CTO also varies between strategies, and many agree that a senior CTO appointment has far less bearing on fund size than it does on technology as a function of the firm. So, for example, a quant or systematic manager will need to bring on board a CTO far earlier than a discretionary fund.

AuM does also have a part to play, regardless of strategy. As Barney Dalton, CTO of Aspect Capital, explains: “To define when a hedge fund needs a CTO by AuM is oversimplifying the issue. But by the time you reach $3bn to $5bn in AuM I’d be surprised if you can do a good job of technology without having someone in- house in a leadership role.”

Of course, individual firms will differ in the type of responsibilities they hire a CTO to take on, but Fred Kauber, CTO of CAIS Group, a distribution platform for wealth managers, says the main recruitment challenge is finding someone with hedge fund expertise and knowledge of systems. “I don’t think CTO hedge fund expertise is particularly widely available,” he says.

“To be the CTO of a hedge fund, you need a blend of industry acumen and a broader set of technical skills that can be applied to a hedge fund context, which is hard to find.” Hence, for funds to attract the best technology talent they are not only having to compete on the type of projects and environment they can offer a CTO, but increasingly on compensation as well.

“On the salary side we’re seeing a minimum 10% increase on what CTOs were being paid five years ago,” adds DHR’s Branthover. “Every firm is different but firms worried about how they are doing are very focused on technology and making sure it’s the best, I’ve seen salary rises of 20% or more (compared to five years ago).”

Cost considerations

“The cost to a fund of hiring a CTO largely boils down to the experience level being brought in,” Kauber adds. “If you’re looking to bring in someone without much of an actual technological remit to oversee vendor relationships, the costs will be relatively modest compared to other senior executives. But if you are looking to bring in a bona fide CTO with experience, you should be looking at compensation levels equivalent to other members of the executive committee.”

And for funds that are investing more in technology internally, there are four general areas where resource needs to be deployed: infrastructure, application development, security and quality assurance. Within these areas, security and infrastructure may blend but security is multi-disciplinary so it also spans applications and infrastructure, as well as the other elements of the technology stack.

“Eventually, you want to have at least one resource in each seat,” adds Kauber. “You have a fairly standard template across organizations but it depends how much you want to populate each of those functions with. Ultimately, the CTO is responsible for keeping the lights on and making sure infrastructure is functioning and secure”

For many funds, there is a need to sustain continuity in their technology and a recognition that to do this means investing in CTO talent. The good news, LeSaffre explains, is that CTOs are a relatively “sticky ” bunch and tend to stay in place for a long time once in a post at a successful hedge fund. “If you’re really good at what you do, you will listen and see what roles are out there but I don’t think [CTOs are] quick to jump,” she says.
“The top roles are few and far between and often they will stay as long as the fund is doing well.”

Former ADA COO Sudan says the ideal scenario for a hedge fund is to promote trained executives to CTO level from within. If that is not an option, hiring from hedge fund peers is the next best thing but in many cases, managers look to banks for experienced technology professionals that have around 10-15 years’ experience and are ready to step up to a CTO role in a smaller team.

Building teams

Of course, once the CTO is in place, one of their key challenges is building an internal technology team that is sustainable for the firm from a cost and business continuity perspective. The challenge here is in attracting young, talented executives either from university or out of graduate programs, who have the necessary skill set but may be more attracted to roles at technology firms or banks.

“Right now there is a lot of competition out there for technology talent and hedge funds are having to fight for every candidate,” says Aspect’s Barney Dalton.

“Historically the recruitment process was used from the perspective of establishing whether a candidate is suitable for the role. Now, that interview process is just as important from a candidate’s perspective.

LeSaffre backs up Dalton’s claim, arguing that firm culture is becoming as big an attraction for low to mid- level executive technology talent as remuneration.

“The culture of the firms they are being interviewed by and the type of people they are going to be working with certainly comes up more now,” she explains.

“Talented candidates want a fun environment with smart people. The projects they are working on is obviously a part of it but they want to be able to connect with the people they are working with because that makes them want to go to work every day.”

This, in turn, influences the way some funds approach their own technology. The CTO of one $5bn AuM firm says they make a big point in interviews of telling candidates that all technology development is approached using “agile methodology” – a set of principles whereby software development is underpinned by collaboration between cross-functional teams.

“That is the way developers want to work these days. Old-fashioned or legacy development systems are a big turn off to talented executives,” the CTO says.

LeSaffre agrees, adding that there is a growing trend of funds moving away from “standard” forms of technology towards more modern functions, such as HTML5 language, in a bid to attract younger candidates.

Turning to the web

Meanwhile, at some systematic funds a different trend is emerging: the use of online web forums to scout for talent. “These firms just want pure technologists who can develop technology and learn the investment side as they go,” Sudan explains.

“A lot of this talent comes from industry forums. Technologists will develop open-source software and publish it on forums, firms will look at that and try to hire those people,” he explains.

Hiring executive talent is complicated further by the desire of many hedge funds to remain lean on headcount, but as technology progresses and cyber-security evolves into a larger, more expensive issue to address, the onus is growing on funds to invest more in technology as a line item cost. “The cost must be part of an ongoing dialogue with the board,” says Dalton.

“The board needs to understand what technology is doing from a business planning perspective, so if all they see is a bunch of acronyms for projects you are looking to do which they don’t understand, they will have no empathy for your hiring request.

“You can’t negotiate that with one conversation; they have to understand how what you are trying to do with technology relates directly to the success of the business and frankly, if you’re not doing that you shouldn’t be hiring more people because you’re probably spending time on something that isn’t as relevant.”

It is for this reason that many funds hire junior technology executives who can wear multiple hats. So, for example, while a larger quant fund may hire technology executives purely to maintain infrastructure and have the revenue available to do that, a smaller quant may require executives to provide infrastructure alongside other technology responsibilities such as desktop support. This, explains Dalton, is not always a disadvantage.

“Generally we are quite small organizations, so we need people who can turn their hand to multiple different problems and aren’t isolated in different areas,” he says.

“It’s about building a good generalist capability and as you grow, you will build teams that will have specific areas of the business they look after, but the more general you can keep people the more useful they are to you.”


Sudan says CTOs typically start with a handful of executives handling all different aspects of technology, but over time firms often start considering their systems in a more architectural way, rather than simply reacting to what the portfolio managers require.

Once this happens, the CTO becomes the designer and chief architect of the firm’s systems while the executives beneath them start to take on more individual responsibilities.

Sudan adds that the sophistication of technology dramatically increases when a firm has three or four technology executives and a CTO, which often mirrors the growth on the strategy side.

With a team in place, the next logical step is for CTOs to unbundle service provider relationships and seek greater efficiencies through use of multiple providers rather than having one outsourced provider handling multiple technology functions.

“You unbundle vendor relationships for better quality from specialists and because you can get greater efficiencies with a CTO managing that,” Sudan explains.

For funds of all sizes, there are a plethora of recruitment issues to consider in the technology space, with no indication that the process will become more straightforward. That in itself is indicative of a wider trend: that hedge funds need to invest more in technology if they want to continue to maintain an edge.