Running A Modern Hedge Fund – Tools and Techniques

In the current finance climate, hedge funds are undoubtedly a formidable force, especially in the stock markets. To put in figures, it was estimated by a Harvard University study as of 2015 that the hedge fund industry had grown from just $39 billion in 1990 to $3 trillion in 2015 and owned about 9% of the US stock market circa 2008-2012.

Hedge funds in the modern sense are pooled investment funds that trade relatively liquid assets, adopting more complex trading and risk management methods in doing so. They are responsible for a great deal of the everyday liquidity in the stock market and thus play a very important role.

Organization, Tools, and Techniques

The organizational structure of modern hedge funds is as thus limited partnerships whereby the investors that provide the capital to be used for trading are partners in the partnership. Then, there’s a management company incorporated as a limited liability company that’s responsible for coordinating the investing operations; the LLCs employ traders to allocate their investors’ capital with the goal of turning a profit, guided by the head trader who’s the hedge fund manager and often bears the title of “Chief Investment Officer”. The LLC also employs personnel for complementary functions that support the trading operations, e.g., HR, IT staff, compliance staff.

The people running the main operations of a hedge fund are usually the fund managers that oversee investment operations, individual traders who allocate capital using various strategies, and then the fund administrator whose duty is to handle all the “back office” duties that mainly comprise financial paperwork processing, ensuring that the investors (limited partners) of the fund have up-to-date information on the performance of their investments and also that the hedge fund complies with the necessary legal requirements.

Fund administrators, traders, and managers have respective tools that they need to efficiently carry out their tasks. They include:

  • Trading Terminals – software packages to implement various types of trades ranging from simple buying and selling of securities to more complex stuff like short-selling and derivatives, et al. This is of utmost importance to a fund’s operation.
  • Administrator Terminals – dedicated software to handle the “back office” functions of the administrator.
  • Accounting Software – Hedge funds need to run complex accounting operations and good software is needed for that.
  • IT – Servers, PC, cloud storage, et al – the computing resources required to run the fund’s operations. This is very important.

There are many choices of tools, be it software or hardware, that’s needed to run the operations of a fund. Examples include Intuit for accounting software, Microsoft Azure for cloud computing, and Bloomberg or Thomson Reuters for trading and market monitoring. Somewhere below, we’ll suggest another tool that you should take account of.

As the head of operations, the fund manager is the person whom the functioning of the fund revolves around, usually the one with the key to make or break things. The main duty of a hedge fund manager is to make investment decisions on behalf of the fund’s limited partners so as to cause them to profit and not lose money. This is the person who sets the vision and overhead trading strategies of the firm, with a life centered on constant monitoring of the markets and evaluating investments. If there’s a need to raise money, the fund manager is usually responsible for making pitches to raise the needed money.

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Overall, the fund manager is akin to the CEO of a firm directing operations, be it a small number of personnel or a large one. As it is, this is often the most important person to the fund who takes credit either for its success or failure.

Software Tools

So now, you’ve gotten an idea about the operation and running of a modern hedge fund. Therein, to run a modern hedge fund requires access to software tools that are crucial to the process. These days, people hardly make calls to their brokers anymore when securities could be easily traded online, and as always when it comes to filling a need, many companies have emerged to provide the necessary tools used by hedge funds. One such software tool is MetaTrader 5, an all-in-one platform to run a hedge fund. Its typical features include suitable administrative control, access to many global exchanges and markets, scalability, algorithmic trading, and access to a community of like-minded traders.

These typical features that are essential for a hedge fund are explained below:

  • Administrative Control – Every hedge fund requires necessary administrative control to handle back-office operations. Software makes it much easier for fund administrators to carry out their activities, with tools to easily sign up investors (limited partners) to a fund so they’ll be able to see crucial data on the performance of their investments and the workings of the fund they’re invested in. With good administrative control, partners in a fund won’t need to periodically hassle the administrators for data when they can easily access it online, saving time and energy to put into other core endeavors.
  • Scalability – Not all hedge funds will remain small forever. Some will grow much bigger from their initial stages, e.g. from few digit millions to hundreds of millions, and in such cases, it’s important for the software platform they use to be able to scale up effectively and not disrupt operations.
  • Fast Communications – In the world of trading, every second matters, every second could bring profits or losses therefore making time essential. Communicating as fast as possible with brokers to execute trades is of utmost importance, especially for the quant traders as they compete head-to-head with thousands of others like them around the globe.
  • Global Trading – It’s important to many traders that they’re able to place trades across markets around the globe, e.g. an American trader buying and selling British equities or a British trader buying securities in Argentina. It’s not always ideal to restrict trading to one region as there are many opportunities lurking worldwide.
  • Algorithmic Trading – Algorithmic and quantitative trading is something many hedge funds prefer to adopt. In fact, some of the best performing hedge funds globally primarily use quantitative techniques, e.g. Renaissance Technologies, AQR, Jump Trading.


In conclusion, running or working at a modern hedge fund is an interesting line of work to be in, but mind you it is no easy feat. There can be many headaches across the way, be it regulation, poor investment performance, raising capital or so. But a good thing is that there are many tools out there that make the process of running a fund less difficult. These tools and techniques are required for success in the modern hedge fund world and this article gives a glimpse of some of them and how they help in fund operations. You can do research on your own to get more in-depth and become familiarized with the required tools and techniques.

Disclaimer: This content does not necessarily represent the views of IWB.



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