D.E. Shaw Spin-Off Arcesium Brings
Precision to Posttrade Analysis
Hedge fund giant D.E. Shaw launches an independently operated company to provide
sophisticated software and services to handle asset managers’ posttrade activities.
BY MICHAEL PELTZIn the wake of the financial crisis, and theraft of regulation that resulted from it,
investors have been pushing hedge funds
to provide greater transparency. As managers
step out from the shadows, they are devoting
more of their time and resources to shadow
accounting — replicating the books andrecords created by their third-party fundadministrators to ensure their accuracy. To dothat, hedge funds have had to build out theirback- and middle-office operations, utilizing

technology from a variety of providers to monitor their posttrade activities. The challenge isgetting the disparate systems to work together
effectively and efficiently, so managers cantake a comprehensive look across all the different asset classes and investment strategies
in their portfolios.
D.E. Shaw Group has a solution. Today theNew York–based firm, which manages $36
billion in hedge funds and other investment
vehicles, announced the launch of an inde-pendently operated company named Arcesium that will offer software and services tohandle asset managers’ posttrade activities.
The Arcesium platform supports all aspects ofthe trade life cycle after a trade is executed,
including trade capture, asset servicing, collateral management, pricing-related services
and portfolio data warehousing.
“It’s a completely modern platform that will
be a hosted solution,” says Arcesium CEO
Gaurav Suri, 44, who had been head of information technology and software development
at D.E. Shaw. “It’s designed so a single platform
can cover a wide range of asset classes and geographies and can deal with the performance orscale requirements that customers have.”
D.E. Shaw developed the platform to provide
sophisticated support for its own posttradeactivities — not an insignificant task for anorganization that does everything fromhigh-volume statistical arbitrage trading tohighly structured private equity deals. Suri,
who joined D.E. Shaw in 1996 from Bell Laboratories as a programmer in its equities tradinggroup, says the firm has invested hundreds ofperson-years into building both the technology
and the services. “Starting in 2010 we did acomplete overhaul of both our technology
infrastructure and our financial operations
processes,” recalls Suri, whose team collaborated on the project with D.E. Shaw CFO Christopher Zaback and his financial operationsgroup. “Soup to nuts, we looked at every one of
our operational processes, making sure thatthey were appropriate for how the business wasevolving and also trying to make sure they werea lot more efficient. Alongside that, we didgrounds-up reengineering of our technologyplatform that supports those operations.”
By 2013 D.E. Shaw had created a highly automated, exceptions-driven platform — meaning that its back- and middle-office staff only
had to get involved in posttrade activities
when there was a problem to solve. It didn’t
take long to come up with the idea of opening
the platform to other firms. “A little over a year
ago, we started looking at it and said, ‘Hey, wereally built something that isn’t only indus-try-leading but is actually unique,’” Suriexplains. “So we asked ourselves, ‘Is there an
opportunity to commercialize it and build anew business?’”
Few companies have a richer technology
history than D.E. Shaw, which was founded in1988 by former Columbia University computerscience professor David Shaw. Leveraging
work that he did in massively parallel computing, the firm was an early pioneer in quantitative investing and became known for its cutting-edge algorithms and wickedly smart people. D.E. Shaw’s interests weren’t confined tohedge funds. The firm launched multiple technology-based businesses, including e-mailprovider Juno Online Services and FarSight
Financial Services, one of the first online brokerage firms. Although Shaw, 63, stepped backfrom day-to-day operations in 2001 to pursue
research in computational biochemistry andmolecular dynamics, he left behind an entrepreneurial culture that lives today. “In someways the launch of this new business is reallyin the DNA of our firm,” Suri says of Arcesium.
“The whole idea of investing in technology
and spinning out or launching new technology-enabled businesses is something we did in
our earliest days.”
Ironically, the biggest challenge that Arcesium may face is its association with D.E.
Shaw, majority owner of the new venture.
Potential hedge fund clients may be reluctant
to share their trading positions with Arcesium,
regardless of the quality of its platform, for fearthat parent D.E. Shaw might have access totheir information. Chicago-based hedge fundfirm Citadel encountered that problem whenit spun out its Citadel Solutions fund administration business in 2007, later rebranding it
as Omnium. The name change did little toquell managers’ concerns. “Omnium has somepretty neat technology,” says the CTO of a large
hedge fund firm who evaluated its offering.
“But none of us could get past the Citadel smell
test.” In 2011 Citadel sold Omnium to Northern Trust Corp.
Suri is confident that Arcesium can avoid
the Omnium problem. He says the new firm,which employs more than 300 former D.E.
Shaw technologists, accountants and operations staff between its offices in New York andHyderabad, India, will be both physically andtechnologically separate from D.E. Shaw. But
potential clients don’t have to take his word.
They can ask Blackstone Alternative AssetManagement — Arcesium’s first customer(outside of D.E. Shaw) and the world’s largest
discretionary investor in hedge funds, with$64 billion in assets in such vehicles. “D.E.
Shaw is beyond reproach in a lot of different
ways, at least in our opinion,” says Brian
Gavin, chief operating officer of BAAM’s
hedge fund solutions group. “They always dothings by the book.”
Gavin, a CPA by training who oversees
BAAM’s hedge fund operational due diligence, has a long history with D.E. Shaw. Prior
to joining Blackstone in 2002, he was the firm’s
auditor as a partner at Arthur Andersen inNew York. “They are not looking to cut corners
to make a few extra dollars,” Gavin says. “Assomeone who was on their audit engagement
for many years, I can tell you that they gothrough so many levels of review just to issue
a financial statement. The amount of precision that they apply to their business is pretty
impressive. That’s why we’re comfortablebeing one of their largest clients.” As part of its
relationship, BAAM is taking a small minority
ownership position in Arcesium.
BAAM will be using the Arcesium platform
for its multibillion-dollar direct trading andspecial situations businesses. “We have verycomplex trades on our end, and D.E. Shaw isprobably the most complex hedge fund out
there in terms of all the different asset classes
they trade,” Gavin says. “We were quite
impressed with how Arcesium will be able tohandle all of our positions.”
Arcesium’s platform combines software andservice. Suri says that some clients will keep
their own people and buy the technology,
whereas others will tap both Arcesium’s technology and its solutions team. The SaaS (software as a service) platform was also designed
to be modular. Asset managers can pick andchoose which parts they want to use, including
trade capturing, treasury and portfolio
accounting. For hedge fund clients, Arcesium
is not looking to replace firms’ existing fundadministrator but rather to play a shadow role.
“We don’t want to get into fund administration,” Suri explains, “but we can provide customers with an independent version of theirdata, to enable them to integrate well withtheir administrators.”
In keeping with its tradition, D.E. Shawcame up with a suitably geeky name for its newbusiness. “Arcesium” is based on the element
cesium, which was discovered more than 150
years ago by two German chemists, including
Robert Bunsen (the inventor of the Bunsenburner), and is used in atomic clocks to measure time. Suri and his team at Arcesium hopeto bring similar precision to the world of posttrade analysis and services.

Disclaimer: The attached document is provided for your information only. None of Arcesium LLC, the D. E. Shaw group, or The Blackstone Group endorses any
information, beliefs, and/or opinions contained in this document or makes any representation as to their accuracy or adequacy. Please note the date of the document,
as the information contained in it has not been updated for any information that may have changed since that date.
Past performance should not be considered indicative of future performance. No assurances can be given that any aims, assumptions, expectations, and/or goals
described in the document will be realized or that the activities described in the document did or will continue at all or in the same manner as they were conductedduring the period covered by the document.

Reprinted from the March 2015 issue of Institutional Investor Magazine. Copyright 2015 by Institutional Investor Magazine. All rights reserved.
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