Hedge Funds are Software Companies

I recently began speculating on analogies and connections between Web 2.0 and financial markets, and that led to the development of our Money:Tech conference. Paul Kedrosky, the program chair, just turned up one more connection:

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.

Now obviously, it’s a stretch to generalize from one hedge fund to all hedge funds, and Wall Street has always been a heavy user of technology. But keep in mind how the definition of a software company is changing. It used to be that a software company was a company that created software for sale. But somewhere along the way, a big part of the web 2.0 revolution was that software companies discovered a better business model: namely to use the software to deliver services that they would monetize in other ways. Renaissance has no intention of selling their software; they can make far more money using it themselves. But this is also true of Google, Amazon, EBay, Facebook, and every other giant of the Web 2.0 era.

That being said, these companies are very concerned about adoption and re-use of their software, even if they don’t charge for it. Web service APIs of various kinds are the preferred means today. Renaissance and other technology-infused hedge funds have no interest in having their software adopted by others.

Increasingly, everything is software. (I wonder how many software engineers Ford or Boeing employs?) So perhaps the distinction between a “software” company, and one that merely uses software, should neither be the ration of developers to non-developers nor whether the software is for sale, but whether the company depends on external deployment and adoption of its software to increase its success.