This is one of the worst times ever for hedge funds. Many are more focused on survival and than rolling out new systems, which is completely understandable. A Tabb Group report notes that even conservative forecasts for fund closures and spending cuts suggest a 40 percent drop in IT spending next year.  

But here's the thing: Not all fund firms are in the same boat. The little guys are especially vulnerable right now, and although the big boys are suffering like all the others, they may be in a better position to survive. Indeed, most expect them to keep on carving out a higher percentage of industry assets over the next few years. The funds poised to survive would be smart to invest in technology right now. As the Tabb Group report, titled "Hedge Funds and Technology: Automation and the Feedback Loop," makes clear, it is really driving the industry right now.  

To gain a competitive advantage, you need faster and better automated systems that reach across asset classes. Indeed, the front-office of hedge funds remain a hot bed of innovation. Trading systems are seen as critical, a way to get a leg up on competitors. But this creates a feedback effect, requiring enhanced systems all along the trading chain, ultimately requiring better back-office processes. Marbled through all this is the new emphasis on risk management. Merrill Lynch, Goldman Sachs, J.P. Morgan and Credit Suisse just took minority stakes in FTEN, which seems to have carved out a nice niche as a risk-management and trading platform.

What would be interesting right now would be some sort of study that attempts to document the returns to IT investing in the industry. In one sense, it would be irrelevant. If the crunch proved anything it was that smart-routing and algorithmic software wasn't enough for lots of firms. Tabb notes that many funds continue to get by with standard processes and trading tools, and yet, the conventional wisdom is that automation is de rigueur. It is necessary but not sufficient for success.  

That bedrock faith means that elite firms will continue to invest as much as they can. - Jim