Money:Tech — Hedge Funds are the New Software Companies

As I’m working away preparing for the Money:Tech conference early next year (and feel free to keep sending all those great ideas), I’ve been thinking a lot about the nature of technology as it’s used by Wall Street. Here is a factoid that jumped out at me yesterday, one having to do with the ratio of software developers to non-developers at a major quant fund versus a major software company:

  • Oracle (56,000 empl.): 1 – 8 (one developer for every eight employees)
  • Renaissance Technologies (178 empl.): 2 -3 (two developers for every three employees)

It’s not too much of a stretch to say that hedge funds are the new software companies. After all, they have more developers per capita than the latter, and they certainly generate more cash flow per capita.

Related posts:

  1. Ellison: Too Many Software Companies
  2. Hedge Funds Do Tech Takedown in Bond Market
  3. Bulletin: Hedge Funds are Risky
  4. Mo’ Money for Social Software
  5. The Next Big Thing in Software

Comments

  1. Ron says:

    Isn’t a “software company” defined as a company that makes and then sells software? Haven’t I-banks always had a lot of developers on staff?
    Is your point that companies that require a lot of custom software and don’t have much marketing, sales, or customer service staff will have a high ratio of developers to overall employees?

  2. Kent says:

    I like cats.

  3. franklin stubbs says:

    RenTech is hardly representative of the typical hedge fund, wouldn’t you admit? That seems akin to suggesting Google is a prototypical software company.
    And as Richard Bookstaber points out, the universe of alternative investment strategies is so vast (basically everything beyond long-only) that speaking of hedge funds as a monolithic group is rather like studying the physical properties of “all materials other than wood.” Surely it’s only a portion of that universe that qualifies as algorithm-intensive.

  4. When the hedge funds start moving out west to Silicon Valley and Seattle, then those of us running software companies will worry. Hedge funds already compete for the same, few talented software engineers. Salaries for software engineers are higher at hedge funds. Fortunately most software engineers feel “safer” from a career-management perspective living in Silicon Valley or Seattle where there’s more career mobility, than NYC or Connecticut. Not to mention most software engineers would rather work for a cool startup than a secretive financial services firm nobody has heard of.

  5. I help CIOs negotiate with sw vendors, outsourcers etc and a question I often ask is “how mad would you be if the Red Cross only spent 10% of what you donated on actual charities”. Most eatsblished public sw vendors spend 7 to 15% on R&D and even that mostly goes to bug fixes, porting to multiple paltforms…real new product related R&D is only 5-6%. It has created a scenario where in many areas, building is better than buying software (especially since systems integrators add several dollars around the sw license, annual maintenance doubles sw license cost every 5 years etc) incentives for CIOs to get the “full oxygen” and write custom code…or encourage smaller software vendors which reverse the spend on SG&A towards R&D – 30 to 50% of revenues

  6. Jordan says:

    Have you considered that the ratio may have to do with the size of the company? Do smaller traditional software companies have a higher developer/non-developer ratio?

  7. Karthik says:

    Hedge funds may hire more software engineers, but I doubt if that qualifies them to be called software companies. On the other hand, several technology firms just cater to writing software for a particular vertical and those working at a hedge fund could be considered no different.
    That said, really what (if any) are the growth opportunities for someone working as a developer in a quant firm? Sure, you may get paid a lot and you may have enough of a pedigree to switch to project management positions in other firms, but that’s about it.
    The growth opportunities for techies in a quant firm are likely to be limited beyond a point. In a generic technology development house, your talent could be used across the board. I doubt if that is the case in a quant firm.

  8. mike says:

    Q: How long before these HF go belly up?!
    A: As soon as this carry trade/housing bubble bursts.
    HF create absolutely no value to society. They’re parasites. The sooner we lose them, the better.

  9. Maurice says:

    Yes but a hedge fund is a boutique organisation and so doesn’t have the all the extra work the supporting worldwide products on multiple platforms in multiple languages and to a much higher standard that say Google does.
    And companies that get as big as Oracle the tend to accumulate loads of marketing weasels, human remains etc :-) or in HP’s case a bunch of NCI cases as non executive board members :-(
    You need to think a bit more before making such simplistic statistical points.

  10. Andrew Lacey says:

    I’m curious about what the poster means by this
    “” In a generic technology development house, your talent could be used across the board. I doubt if that is the case in a quant firm. “”"
    What sort of opportunities to use technical talent are available to developers in a generic technology firm that aren’t available in quant firms.

  11. Anand Gupta says:

    Thanks for the insight. Yours is the only blog I regularly read, because it is able to provide me with deep insights in a very brief and concise way.

  12. Noone says:

    The analogy doesn’t quite work: a lareg number of developers at RenTech can also easily be labeled as traders.

  13. noone says:

    The analogy doesn’t quite work: a large number of developers at RenTech can also easily be labeled as traders.

  14. Scott Lawton says:

    Vinnie: brilliant! Totally obvious in retrospect but not an angle that occurred to me before. Of course “build” only works with IT departments that actually know how (some variation of “agile”), and “buy from smallco” can be a hard sell no matter how much sense it makes.

  15. Erkko says:

    I find this number intriguing. Even if the direct comparison is not easy to justify because of too many different parameters, I would be worried about the developer ratio for most “real” software companies.
    Who are the people who really create the economic value in software companies??

  16. Karthik says:

    To the poster who sought clarification on my earlier comments:
    > What sort of opportunities to use technical
    > talent are available to developers in a generic
    > technology firm that aren’t available in quant
    > firms.
    The end goal of a software firm is to make and sell software. The end goal of a quant firm is *not* to make and sell software.
    If you are in a decent-sized software house, you have more options when it comes to choosing a career path. For instance, take a big software house like IBM – you could be in products, services, consulting, solutions or R&D.
    Someone doing product development could easily use their talent in R&D, or even in services. Similarly, even someone who does management in R&D (say, innovation management) could easily switch to a product managerial role in product development and do well.
    As someone who is working in a telecom technology company, I often see other parts of the company needing people with specific skills that are not natively available there.
    On the other hand, the options available in a hedge fund are rather limited. Your ability to switch roles and explore areas of interest is severely constrained by the end goal of the firm.
    At the end of the day, writing software isn’t the goal of the firm. In contrast, a technology company thrives on just that – technology.

  17. dutch says:

    yep Ren is hardly representative. most hedge funds are two guys in a rented office sharing a bloomberg and a fax machine.

  18. Have you considered that the ratio may have to do with the size of the company? Do smaller traditional software companies have a higher developer/non-developer ratio?