Strategies For Optimizing Operations And Reducing Costs

May 14 2009 | 9:10am ET

By Mark Coriaty -- With volatile markets dominating the headlines, it is not surprising that hedge funds and alternative management firms are looking for ways to reduce expenditures while also increasing efficiency. Close examination of various business processes can highlight areas for improvement and cost-savings. But there are elements of business that cannot be eliminated or decreased—a firm’s employees must be able to do their jobs effectively. While firms should not eliminate vital information technology services and infrastructure, there are a number of ways in which firms can reduce spending without compromising business efficiency, among them virtualization technology, smart purchasing, broker execution and data protection.

Virtualization Technology

Virtualization technology is a growing trend in the financial services industry, and one that hedge funds and alternative management firms should closely evaluate.  Virtualization makes it possible to run multiple operating systems and applications on one physical server, reducing the need for additional, and sometimes infrequently used, hardware. By combining multiple servers into one, a firm can reduce floor space, as well as power and cooling expenses.

Hardware and software licensing costs can also be condensed because there are fewer server environments to support. Additionally, fewer servers mean less maintenance, so firms can save on personnel and operational costs. By consolidating multiple servers and applications, virtualization technology offers firms a simple cost-reducing option without generating fears over compromised service. In addition to such technologies, smart business processes can go a long way in helping firms cut costs.

Smart Purchasing

Making smart purchasing decisions is one of the simplest ways for hedge funds and alternative investment firms to quickly reduce spending. For example, firms can buy multi-year licensing on software that they know will be needed in the future, such as anti-virus and backup software. Purchasing multi-year licenses provides discounts—up to 10% with certain vendors—compared with renewing the software licenses each year. Firms should also ask vendors about rebates or special incentives, buying in bulk and blanket discounts.

Another cost-saving step is to avoid last-minute ordering, which not only eliminates exorbitant overnight shipping charges but also gives firms a greater selection of hardware choices and customization options.  A final recommendation requires an internal evaluation. Firms should evaluate whether they need all of the functionality each service and product offers, and speak with their IT provider or chief technology officer about reducing the capabilities of these to reflect their immediate requirements. Software and hardware can always be upgraded at a later time.
Broker Execution Costs

Hedge funds and alternative investment firms can reduce broker execution costs in a number of ways.  First, many broker services are offering lower costs to firms as a result of the current financial climate.  Researching lower execution costs with different brokers, or negotiating prices with your current broker, can ultimately provide your firm savings. That said, a firms must maintain a balance between cheap trading and leveraging a specialized broker.  A firm may pay less per share with a discounted broker, but that broker may lack the specialization of finding the best execution in the marketplace.  A firm should conduct a cost-benefit analysis before making any major change. 

A few other broker execution related areas to explore include:

  • Agency desks are typically much less expensive and broker neutral, which enables firms to find value and lower execution costs, as well as divert more share/value to these agency desks to help reduce costs.
  • Negotiate a lower soft dollar cost for research payments to help reduce overall execution costs through discounted research costs.
  • Leverage direct market access platforms and algorithmic tools, which are typically associated with lower per share trade cost and better execution.

Disaster Recovery & Data Protection

It is unwise to operate a business without sufficient data protection and backup, but there are opportunities to reduce costs and implement a business continuity plan without breaking the bank. Firms looking to deploy disaster recovery can take a phased approach and meet investor requirements without investing in the most advanced and comprehensive solutions and applications on day one. Focusing on protecting business critical applications, which are directly linked to revenue generation, can be first priority. Hedge funds can upgrade and expand coverage when more resources become available at a later date. For firms with disaster recovery systems already in place, they can reduce costs by eliminating such capabilities from less critical applications.  These lower priority applications can be protected via lower cost online backup services.


Telecommunications services are an additional area that can provide flexibility in spending. Many service providers will offer to look over your invoices and search for areas where cuts can be made. Of course they want business from you, but they also want you to remain a valued and satisfied customer, which means they will likely go out of their way to help you lower your telecomm bill if you ask them to. By reviewing and evaluating costs, your service provider can sometimes provide you with immediate financial relief; it may be small relief, but if the effort to assist you is there, you can rest assured that your provider will find other ways to help you out. 

During tough economic times it is realistic and wise for investment firms to look for ways to reduce costs. Everything from personnel to technology is a consideration. But it is essential that in eliminating or reducing infrastructure and revising business strategies, performance and service should not be compromised. Firms should complete thorough evaluations of the services they use and business strategies they implement to ensure they all contribute to keeping business practices efficient, successful and affordable.

Mark Coriaty is director of professional services at Eze Castle Integration.

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