Digital technologies are radically reshaping the alternative investment industry.
Digital technologies are radically reshaping the alternative investment industry. But a large majority of hedge funds and private equity firms appear to be too slow to respond. This is the key finding of a new report, Alternative investments 3.0 - digitize or jeopardize, based on a global survey of 125 hedge funds and private equity firms and conducted by KPMG International and CREATE-Research.
While 98 percent of respondents say `business as usual' is not an option, at least three out of five respondents said they are still at the nascent stage of `awareness raising' with respect to revolutionary technologies that could potentially transform their businesses.
“What the internet did to the music business, digitization will do the alternatives industry -- it's not a question of if, but when. The big players are well ahead, but the rest face an Everest of a task,” says Anthony Cowell, Head of Asset Management, KPMG in the Cayman Islands, and the report's co-author.
Less than a third of respondents said they are at the implementation stage for key innovations, while for both hedge funds and private equity, advanced technologies such as blockchain and robo advisors have been implemented by three percent or fewer.
“Only a minority of firms we surveyed are deploying innovations designed to give them a competitive edge. With growing pressure on costs and the demands of digital-savvy millennials, this will have to change markedly,” adds Al Fichera, Global Head of Alternative Investments, KPMG International.
Indeed, when asked which factors will accelerate the pace of digital innovation in their business over the rest of the decade, respondents cited market-driven factors, including growing cost pressures (58 percent), changing investor needs (51 percent) and fees and charges, becoming a major differentiator (30 percent). They also cited client-driven factors such as growing social acceptance of digitization, and end-investors becoming more demanding (37 percent) and more financially and digitally savvy (36 percent).
Holding back the pace of digitization are a number of technology and business-related factors. On the technology side, they include cyber security (58 percent), legacy IT systems (43 percent), and the high cost of digital innovations (42 percent). On the business side, they include senior executives being too focused on day-to-day matters (40 percent), regulatory issues (39 percent) and low risk appetite in the corporate culture (31 percent).
The survey identified activities that are especially ripe for disruption in the front, middle and back offices. They include portfolio risk management, research and securities selection, alpha generation, deal flows, risk & compliance and fund accounting.
The survey also offers tips to business leaders on how their firms can ramp up the pace of innovation. It includes collaborating with fintechs, forming strategic partnerships with third-party administrators, improving the human -machine interface to harvest the benefits of machine learning, and broadening and deepening the talent pool to upgrade in-house technology capabilities.
“There are no easy options, but to do nothing is the worst. Alternative managers must either embrace the revolution that is sweeping through their industry or risk being sidelined, “says the survey's co-author, Professor Amin Rajan, CEO of CREATE-Research, based in London.
Access the full report here.
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Alternative investments 3.0 - digitize or jeopardize is jointly produced by KPMG International and CREATE-Research, examining the impact of digital disruption on the alternative investment industry. The report focuses on two key segments of alternative investments most amenable to digitization - hedge funds and private equity - and is based on research across 125 firms in 19 countries as well as a select number of in-depth interviews with CEOs, CIOs and Board Directors of alternative investment companies.
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 154 countries and territories and have 200,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
CREATE-Research is an independent research boutique specialising in strategic change and the newly emerging business models in global asset management. It undertakes major research assignments from prominent financial institutions and global companies. It works closely with senior decision makers in reputable organisations across Europe and the US. Its work is disseminated through high profile reports and events that attract wide attention in the media. Further information can be found at www.create-research.co.uk