Modern hedge funds face challenges unheard of a decade ago. Among these, robust competition, unparalleled regulation and compliance requirements and, increasingly sophisticated institutional investors who must articulate the rationale behind their investment decisions to equally sophisticated directors and trustees, round out the top three.
The Holy Grail
Institutional assets are the Holy Grail for every hedge fund manager. There are simply too few high net worth individuals meeting the definition of an accredited investor to satisfy the ravenous appetite of a bloated hedge fund industry. Growing assets under management (AUM) necessitates attracting institutional investors to the firm.
What Do Institutional Investors Want in a Hedge Fund?
Mackay Williams LLP, a U.K.-based market analysis and consultancy firm revealed the answer after Fund Buyer Focus Ltd., a Mackay Williams subsidiary, surveyed a pool of nearly 1000 fund selectors.
In order of importance, the selection of a fund manager is dependent upon the 1) ability to manage risk, 2) quality of the investment team and, 3) quality of fund reporting. So, how does technology help hedge funds address these top three concerns?
Technology’s Greatest Impact
Arguably, technology’s greatest impact lies with fund reporting. Two firms that specialize in regulatory reporting are KNEIP and Nedelma Inc, through its Portfolio Amalfi™ proprietary accounting and reporting platform.
KNEIP boasts straight-through processing (STP) capability, while Portfolio Amalfi™ lays claim to dynamic reporting in conjunction with an array of other capabilities including multi-asset, multi-lingual and multi-currency options.
The take-away here is that technology can streamline the reporting process and save hedge fund firms untold man-hours spent compiling reports for regulators and investors. With no relief in sight on the regulatory front and increased demand from investors for transparency, this technology has the potential to reduce costs and provide a competitive edge to those firms bold enough to implement it.
Investment Team Quality
Technology has not evolved to the point that it can make investment decisions. However, investment team quality can be enhanced with the technology available today. In the two examples above, it is clear that a great deal of time can be saved. By allocating this time to analysis, subsequent investment decisions may be made with a greater depth of knowledge which ideally results in superior investment strategies.
Another firm offering an array of services, including compliance and risk management, is Broadridge Financial Solutions, Inc. While one could make the argument that traditional risk management tools such as mean-variance analysis, value-at-risk, stress testing and scenario analysis might be relatively simple to model, the fact remains that the manager is the best judge of the appropriate risk/reward trade-off for the portfolio and he will jealously guard the broad discretion he rightly holds with respect to investment decisions.
Recent technological advances have the potential to enhance operational efficiency, obtain answers to crucial questions with greater rapidity, simplify workflows, ease the burden of compliance, and provide a competitive edge for your firm in the eyes of investors. These facts alone should provide every hedge fund manager with an incentive to explore the additional advantages these technologies may provide.