Hedge Funds prove agile and resilient as they embrace technology and change.
After the initial dramatic selloff earlier this year, hedge funds are regaining their momentum, having experienced record quarterly inflows totalling $220 billion, driving assets under management (AUM) up to around $3.177 trillion. [1] Simultaneously, outflows subsided in Q2 falling to $12.2 billion, or 65% less than what they were during the volatile first quarter when redemptions topped $33.3 billion. Although investor confidence in hedge funds has rebounded, now is not the time for complacency. The next 12-18 months will be vital for the industry, not least because capital raising is likely to become much tougher once the recessionary impact of COVID-19 is truly felt. In order to thrive amid these difficult circumstances, hedge funds need to ensure their technology systems are cutting edge.
IBOR – time to consolidate
The concept of IBOR (investment book of record) is not novel. In fact, it has existed for several years now, but what exactly does it mean? Historically, asset managers have collected data from multiple sources, before processing it – often through fragmented systems and over different time horizons – leading to errors and inaccuracies. This regularly resulted in suboptimal outcomes and occasionally bad returns for end clients as a lot of this information was leveraged by hedge funds to shape their critical investment and operational decisions. As post-2008 hedge fund returns evaporated, it was rapidly recognised that a more holistic and nuanced approach to data gathering was necessitated.
Increasingly, hedge funds are turning to IBOR whereby information across the entire business and all asset classes is stored in one location, making it easier to access and digest. In order to facilitate the transition to IBOR, hedge funds need to invest in their technology and shift away from legacy systems and processes. By developing a well-structured IBOR, hedge funds will be able to better manage their own businesses by having a singular and more accurate oversight of their positions and data. This in turn could have a positive impact on performance thereby driving asset growth.
Scalability central to operations
Hedge funds are facing a business upheaval. Even before COVID-19 struck, the industry was dealing with waves of new regulations and reporting requirements across both the US and EU. At the same time, institutional investors – who increasingly embraced alternatives post-2008 – demanded greater levels of transparency and disclosure from their managers. The firms that successfully navigated these dual challenges were often the ones who had scalable and flexible technology systems in place, making it easier for them to adapt to the new world order. In a post-COVID-19 environment, expectations will change once again with a renewed regulatory and client focus on areas such as operational resiliency. Relying on legacy technology is not sustainable. Instead, hedge funds need to ensure that their systems are agile and resilient to future-proof their businesses.
Cyber – a rapidly evolving challenge
Cyber-security has been a recurrent theme but COVID-19 – which forced many hedge funds into adopting remote working practices – is exacerbating the problem. Seventy-four percent of hedge funds told a KPMG survey that they were operating in a higher cyber-risk environment (i.e. targeted email phishing attacks) while 71% felt staff were more vulnerable to cyber-attacks when working from home. [2] It is imperative hedge funds have robust cyber-hygiene measures in place during this difficult period. Falling victim to an attack – irrespective of whether assets are stolen or performance is compromised – could prompt some risk-conscious institutional investors to redeem their funds.
[1] Hedge Fund Research (July 20, 2020) Hedge fund assets surge
[2] KPMG – Agile and Resilient: alternative investments embrace the new reality
