The EY 2015 Global Hedge Fund and Investor Survey was published this week. The 2015 hedge fund survey results highlights that it has been a year of growth and evolution for the hedge fund industry, but also reflects concerns about regulatory challenges, cost pressures and how to most effectively internalize new technologies.
The introduction to the report notes: “As managers and investors continue to take on new challenges borne from regulatory and cost pressures, new operational considerations and the war on talent, those that consistently innovate and respond to market demands continue to grow. Efficiency is the name of the game, and embracing technology and data optimization is the new imperative.”
The report focuses on three areas that the 110 managers replying to the 2015 survey indicated were of high priority in the hedge fund industry.
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Focus on growth in hedge fund industry
The EY report notes that growth remains hedge fund managers’ top priority as the majority see growth as the “critical success factor in a lower margin environment”. Also of note, growth is occurring differently depending on where each hedge fund is in its life cycle.
Smaller and mid-size managers in their early years tend to try and grow their client list and present more investors with their core offerings. The largest managers who already have brand recognition in the industry typically seek to expand their offerings. That said, in the past this meant new alternative products (i.e. registered funds), but today managers are prioritizing offering new strategies within the same hedge fund vehicles.
The report notes this trend “is partially a result of the mixed operational and financial results of launching new products, but also a reflection on changing investor demands by market participants who are more sophisticated and want tailored exposures that align with their unique investment goals.”
Prime brokerage relationships
The survey also made it clear that hedge fund industry managers are concerned about recent bank regulations as they are impacting their prime brokerage relationships. New bank regulations, such as Basel III and Dodd-Frank, have begun a cycle in which is “only in the early innings.” The report notes “managers are experiencing re-pricing in addition to trade financing constraints with many of their counterparties. This has caused managers to evaluate the manner in which they obtain financing and, in some cases, make changes to their strategy.”
Technology and outsourcing
Given the challenges that hedge fund managers are having to deal with due to rising costs, managers are increasingly moving toward implementing new technologies and outsourcing as they create a more efficient and cost effective operating model.
The EY report emphasizes that data management and investments in technology are essential for hedge funds due to to increasingly complex fund operations, a heightened focus on cyber security and the never-ending regulatory and investor mandated reporting requirements. Hedge fund industry managers believe a well-designed front to back office infrastructure will improve efficiency and lead to cost benefits.
Managers are embracing more robust middle office solutions as the leverage from back office technologies is more fully exploited. These new offerings make it possible for funds to scale their model as grow in a cost efficient manner while keeping internal resources focused on core activities. Many managers replied that they projected that the overall industry towards more comprehensive technology solutions, and argue this transition is not really that different than how the fund industry moved to back office outsourcing earlier in the life cycle.
See full study below.