Shrinking margins and growing investor demands are forcing managers to innovate
As investors become increasingly mindful of costs and performance, active managers have been forced to adapt and change. Some have adopted performance-based pricing, while others are improving their due diligence. Hedge funds, meanwhile, are looking at a more radical solution: technology investment.
According to the newly released EY 2017 Global Hedge Fund and Investor Survey, 57% of hedge funds said they are investing in or will invest in operational efficiency, generally through technology.
Managers are reportedly investing in their middle and back office to improve speed and quality of data reporting and management; 25% of managers, mostly those whose assets under management exceed US$10 billion, have made or will make investments in artificial intelligence and robotics. Half of managers said their organization has “implemented something innovative” with their tech investments, while 40% spoke about automating manual processes.
The enhanced focus on technology is also affecting recruiting practices. According to the report, the traditional response of managers to business challenges has been to add headcount, which has driven margin pressures. Forty-four per cent of managers surveyed reported increases in headcount among their investment professionals, portfolio managers, and research analysts; 38% reported seeing increased expenses in these departments over the past couple of years.
“Managers looking to achieve scale should evaluate other solutions, such as investments in technology or outsourcing,” the report said. Attracting the right kind of talent is also important, as more than 30% of managers are increasingly looking for employees with an understanding of technology and data analysis.
There has also been a shift in expectations for use of non-traditional data such as social media data, private company data, and credit-card data in investment. Investors surveyed said only 24% of the hedge funds they’ve allocated assets to use non-traditional or next-gen data; that number is anticipated to reach 38% in three years. Meanwhile, 46% of managers said they use or expect to use non-traditional data in their investment processes.
Aside from technological innovation, the report noted significant demand for alternatives, with 40% of investors reporting plans to shift hedge-fund assets to alternative asset classes. Some of the more popular targets for new alternative investments include private equity (76%), real assets (66%), long-only (53%), and best idea products (49%). Managers also said they were exploring opportunities to grow by offering separately managed accounts and customized portfolio exposures.
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