How Innovation And Technology Are Shaping The Hedge Fund SectorVW Staff
What impact will technology have on competition in the hedge fund sector over the next 5 years?
Hedge Fund Sector – A New Era Of Competition
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.
While some may suggest that the hedge fund sector has been somewhat shielded from the disruption that has been wrought on other financial services sectors by digitization and technology, it seems clear that the sector is now undergoing a period of technology and innovation-led competition.
According to our survey, 94 percent of hedge fund managers believe that technology will have an impact on competition over the next 5 years. More than a third — 38 percent — say that technology’s impact will be significant.
“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.
Larger funds seem more concerned about the impact that technology will have on competition. In fact, funds with AUMs of more than US$500 million are around 10 percentage points more likely to say that technology will have a significant impact on competition than those with AUMs of less than US$500 million.
“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.”
Already, fund managers around the world are investing significant sums into technology and tools. And, not surprisingly, the amount invested tends to increase with the size of the fund. More than half — 54 percent — of those with AUMs of more than US$5 billion report spending more than US$5 million per year over each of the past 5 years. Eighty-six percent of funds with AUMs of less than US$500 million report spending less than US$500,000 per annum on technology over each of the past 5 years.
Our data suggests that 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 12 percent of European respondents. And while no funds based outside of North America and Europe report having spent more than US$5 million on technology over the past 5 years, this is likely indicative of the size of funds in Asia Pacific rather than a lack of willingness to invest.
What is clear, however, is that 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.
Driving for efficiency
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.
Almost as many — 88 percent — say that technology is expected to help achieve their efficiency objectives by, for example, stream lining transaction processing and improving controls. “For many hedge fund firms, there is a need to improve operational efficiencies as well as achieving their compliance objectives,” argued Jeffery Kollin, Partner, KPMG in the US. “In the new age of operational effectiveness, as well as the ever changing regulatory landscape, firms are finding it necessary to use technology to both improve margins, as well as managing the compliance processes more efficiently and more effectively to improve overall control and better manage risk.”
However, our survey also indicates that 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.”
Article by KPMG International, read the full article here.