Hedge funds are big users of software. Their usage can be divided into three areas:
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Front Office
The front office of a hedge fund does the trading. A good hedge fund will have proprietary software that gives them an edge in whichever markets they follow. Hedge funds are usually divided up into a series of trading desks, and different desks have different software needs. For instance, a statistical arbitrage desk will use very mathematical programs written by quantitative analysts, usually from the finest schools. Sometime, professionals such as physicists and mathematicians leave academia to work at hedge funds developing sophisticated models used to trade a particular type of asset, such as options or futures. Although each desk is different, they all may share certain software programs, such as trade entry and profit/loss analysis.
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Back Office
The back office at a hedge fund makes sure that once a trade is executed, the trade settles successfully and all funds are accounted for. This usually requires versatile systems that can communicate with counterparties directly to confirm trade details and track the progress of settlements. Each day, back office clerks must prove out all trade volume, so that all trades are matched to the proper trader and counterparty, are allocated to the right internal and external accounts, and that any special conditions have been met. The back office also administers all corporate actions, such as stock splits and dividends, for assets owned by the fund. There will probably be an application to assist with the borrowing and lending of securities. A securities database will maintain records on all assets available for purchase and sale, and a trade book will show the real time positions of each trader, desk, and firm-wide. Accounting software keeps the books and allocates profits and fees.
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Middle Office
The middle office is concerned with managing the risks of the firm. There are many kinds of risk that a hedge fund must manage. For one thing, a hedge fund must always optimize its use of cash, making sure there is enough on hand to pay for trades at settlement, and that any excess cash is invested where it can make the biggest overnight return. More generally, the middle office will look at the risk vs. reward profile of each desk’s portfolio to determine if the desk is taking a too aggressive (or not aggressive enough) trading stance. Mathematical formulas can gauge the value at risk and help enforce trader discipline.
Hedge funds live and die by the quality of their trades, which in turn rely upon tons of software to determine what to buy and sell, to specify what prices to use, and to manage their operations.