Hedge fund managers know that competition will be tight over the next 5 years. And according to our survey, most expect to significantly increase their focus on innovation in order to uncover new operational efficiencies, improve compliance and drive investor relations. A new era of innovation-led competition is emerging.
According to our survey, 94 percent of hedge fund managers believe that technology will have an impact on competition over the next 5 years. “I’m pretty sure that – by the time I’m out of this business – it will be completely unrecognizable from where it is today,” forecasted one fund manager with more than 25 years of experience.
“The larger funds likely see more scope for driving efficiencies and tend to have larger budgets devoted to technology which often means that they can capture a competitive edge through targeted technology investments,” noted Robert Mirsky. “But smaller funds tend to lack the legacy systems and processes that often impede technology implementations at larger firms, so while the scope for competitive advantage may be narrower, the value of technology is certainly broad.”
Fund managers around the world are investing significant sums into technology and tools. The amount invested tends to increase with the size of the fund. More than half of those with AUMs of more than US$5 billion report spending more than US$5 million annually. Eighty-six percent of funds with AUMs of less than US$500 million report spending less than US$500,000 per annum on technology. “We spend a lot of money on technology each year – somewhere around US$10 million per year is invested in some way into technology,” stated one large fund manager. “We have three offices, two data centers and an entire proprietary system built out and that requires continuous investment.”
Our data suggests North American funds are investing more in technology transformation in the hedge fund sector. One-in-five North American respondents say they spent more than US$5 million on technology over each of the past 5 years versus just 12 percent of European respondents.
What is clear, fund managers expect to increase their investments into innovation going forward. Whereas just 16 percent of those who manage smaller funds say they spent more than US$500,000 per year on technology in the past 5 years, 28 percent say they will spend at least that amount over each of the next 5 years. Thirty-six percent of mid-sized (US$500 million to less than US$5 billion in AUM) firms say they spent upwards of US$1 million in the past; 47 percent say they will invest at least US$1 million going forward. And the percentage of large (greater than US$5 billion in AUM) funds that will spend more than US$1 million per year will also increase, albeit only by around 5 percentage points.
Overwhelmingly, hedge fund managers are investing into technology to drive either efficiency or compliance improvements for their business. Upon closer examination of the results nine out of every ten respondents cite improved controls and compliance as a primary objective for their technology spend. Given that – in 2013 – we estimated that compliance was costing the industry upwards of US$3 billion per year1 (and that number has likely risen much higher since), it is not surprising that compliance ranked as a top objective among our respondents. “For many hedge fund firms, there is little difference between efficiency objectives and compliance objectives,” argued Jeff Kollin with KPMG in the US. “For those firms, this isn’t about improving margins; this is about managing the compliance processes more efficiently and more effectively to improve overall control and better manage risk.”
There are a number of secondary objectives that fund managers hope to achieve from their technology investments. More than half hope to use IT to better meet investor expectations in areas such as transparency and reporting. Almost half say they expect technology to help improve their overall competitiveness or drive cost reductions. And more than two-fifths say they hope to reduce complexity through technology enablement. “All too often, hedge fund executives and managers focus on the cost and efficiency side of the technology equation without putting enough consideration towards the growth opportunities,” noted Adam Hirsh, Director, KPMG in the US. “Even in situations where technology is helping eliminate redundant administrative tasks in the back or middle office, fund managers should be asking how they can reallocate those resources to improve the front office and drive better results.”
A look at the challenges and opportunities that technology and innovation are creating in the hedge fund sector.