According to a new report by EY, the big management consulting and research firm, most hedge fund managers are adapting to the revolution in technology. They, possibly more than most traditional mangers, are trying to use new technologies to enhance their processes.
The report says:
- More than half of hedge fund managers are innovating to improve their operational efficiency
- A third of investors want to see hedge funds innovate more in front office/investing
- Nearly half of managers are using non-traditional data in their investment process, and
- Managers are seeking talent with technology and data analytics skills, as this becomes increasingly important to investors.
A majority of hedge fund managers (57 per cent) are innovating to improve their operational efficiency in response to market disruptions and to avoid falling behind the industry, according to the “EY 2017 Global Hedge Fund and Investor Survey: How will you embrace innovation to illuminate competitive advantages?” The 11th annual survey found that hedge fund managers are actively seeking innovative ways to improve operational efficiency and grow their asset base, as pressure on margins shows no signs of abating. Meanwhile, investors also said they recognise the need for managers to innovate, with 30 per cent noting they want managers to do so in the front office
Antoinette Elias, EY’s ‘Oceania Wealth and Asset Management’ leader, said: “The pace at which the hedge fund industry is being disrupted continues to accelerate. Advances in technology are creating new threats, but also new opportunities.
“In this environment, hedge fund managers need to be more proactive in identifying novel solutions if they want to keep pace with investors’ appetite for innovative new product offerings, stand out and remain competitive in a crowded sector and, ultimately, drive sustainable growth.”
Evolving investor demands and competition from alternative asset classes consistent with previous findings show that fewer investors plan to increase their allocations to hedge funds. Of those surveyed, 15 per cent of investors note they are more likely to decrease allocations in the next three years versus 11 per cent of investors who indicate they plan to increase allocations. However, the vast majority (74 per cent) still expect to keep their hedge fund allocations flat.
Alternative investments are also continuing to spur competition, with 40 per cent of investors now saying they plan to shift hedge fund assets to alternative asset classes and 20 per cent saying they will begin using non-traditional hedge fund products for the first time.
In particular, private equity is experiencing a dramatic shift in demand, as three-quarters (76 per cent) of investors currently allocate or plan to allocate funds to this alternative asset class in the next two years.
To attract and retain investors, the survey reveals, over half of managers now offer separately managed accounts (56 per cent) and funds with customised fees and liquidity terms (52 per cent), and two-thirds of managers have adopted or are considering non-traditional fee structures for growth (66 per cent).
The largest hedge fund managers have been able to keep momentum, making the largest investments in non-traditional product development.
Rohit Khanna, EY Oceania hedge fund leader, said: “Investors are turning to customised products for a number of compelling reasons. Managers of all sizes must engage in dialogue with their investors and align product offerings that are responsive to shifting investor needs.
“In Australia, the investment management landscape is changing. More passive investment options, like ETFs, are taking on a growing share of the traditional asset management space and, at the other end of the spectrum, alternatives such as private equity and venture capital are increasingly attractive to investors. “However, there are still a lot of opportunities for Australian hedge funds willing to offer tailored products that will provide diversification to traditional portfolios and adapt to the changing preferences of investors.”