2013 global hedge fund and investor survey
Once considered a by-product of regulatory change, increased efficiency is now a significant investor demand. At the same time, technology advances are redefining and enlarging the concept of efficiency.
Tracking the trend, this year’s survey takes a deep look at operational efficiency. We asked hedge fund managers about headcount, data management, capital spending, outsourcing and shadowing. Our key findings on these issues are below.
Managers continue to increase headcount to support growth, although hiring appears to be slowing.
The largest managers continue to add headcount at a faster rate than the overall market in almost every function. Because costs increase with headcount, it is critical that managers find efficiencies in scale - particularly in support functions – to protect margins.
Most managers have enhanced their capability to achieve scale in the back office.
The differences between large, mid-size and small firms make for an interesting comparison. The largest managers have sufficient scale to leverage technology and achieve efficiency. The smallest cannot afford to be inefficient, so they have been slower to add complexity.
Mid-size (US$5b to US$10b) managers face the biggest challenges because they are adding infrastructure but have not yet achieved the scale necessary to support them.
Managers have reduced middle-office headcount by outsourcing and investing in technology.
The middle office is increasingly subject to outsourcing and automation. The integration of front, middle and back office functions — made possible by better technology and data management practices — is driving this trend.
As managers seek efficiencies from technology and outsourcing, they will need to address data challenges.
Increased regulatory demands, availability and accuracy are the top three data-related challenges reported by this year’s survey respondents.
Data governance and management are a challenge facing the entire financial services industry. Firms recognize that “good” data is critical for risk management and operational efficiency.
“We are constantly looking at our architecture design to try to improve how we capture data and how we distribute it.”
— Manager, North America, under US$10b AUM
Managers continue to invest in technology even though fewer are making large capital expenditures.
The slowdown is likely a sign that infrastructure investments made over the past two years have paid dividends. Still, managers continue to make certain strategic investments such as upgrading legacy trading systems and enterprise infrastructure.
Most managers are outsourcing what they can.
Having already outsourced most back-office functions, managers are outsourcing other non-core activities (see chart).
For which of the following do you outsource any aspect of the function?
In which categories do you expect to outsource more of the function in the next two years?×
Investors generally accept outsourcing, with European investors more accepting than their North American counterparts.
Managers continue to fully shadow, but there is a growing trend to pare down shadowing.
Hedge funds fully shadow to mitigate the risk of error and indirectly to provide a contingency plan. They shadow more in the front office, where sensitivities to errors are greatest and timely resolution most critical.
When asked what conditions are needed to reduce shadowing, some managers cited a higher level of integration with their administrators. Others admit that they would need agreement from all their investors to stop.
Fewer managers expect to pass more costs to the funds, but investors are increasingly accepting.
The paradox can likely be explained by improved performance, which has shifted investor focus away from costs. Managers have also actively discussed the costs of regulatory compliance with investors.
Most managers have not considered using a second administrator for shadowing.
Managers are reluctant to cede control of oversight and shadowing. They recognize the likely headcount reduction is not large enough to warrant the additional costs.