The EY “2017 Global Hedge Fund and Investor Survey: How will you embrace innovation to illuminate competitive advantages?” reveal that 57% of surveyed hedge fund managers are innovating to improve their operational efficiency in response to market disruptions and to avoid falling behind the industry.
In addition, technology is anticipated to help grow asset base even as pressure on margins remain. Investors also said they recognize the need for managers to innovate, with 30% noting they want managers to do so in the front office.
EY Asia-Pacific Wealth and Asset Management Leader, Elliott Shadforth said: “The pace at which the hedge fund industry is being disrupted continues to accelerate. Advances in technology are creating new threats, but also new opportunities. In this environment, hedge fund managers need to be more proactive in identifying novel solutions if they want to keep pace with investors’ appetite for innovative new product offerings, stand out and remain competitive in a crowded sector and, ultimately, drive sustainable growth.”
Figure 1: Reasons for interest in innovation
Source: EY, 2017
Investors looking for front office innovation
Given the excitement around FinTech and the advancements in data set analytics, it’s no surprise almost one-third (30%) of investors said they would like to see hedge funds become more innovative within their front office operations. While investors say only 24% of the hedge funds they currently allocate to use non-traditional or next generational data and tools, they expect that number to rise to 38% in three years.
Figure 2: Where Hedge Fund managers are investing
Source: EY, 2017
The landscape is quickly changing in response to investors’ demands, as managers are implementing innovative approaches to improve operational efficiency (57%), attract capital (36%), attract/retain talent (28%) and the front office (25%). The goal is to invest in cutting-edge technology to improve the speed and quality of data reporting.
While, in 2016, only half of managers used or expected to use non-traditional data or tools in their investment processes, this year, more than three quarters indicate they currently use this technology (46%) or have future plans to do so (32%).
Pressute to innovate
Until now, most managers have responded to added complexity, increased product offerings and reporting requirements by increasing headcount, which in turn drives margin pressure. Simultaneously, investors continue to place management fees under scrutiny, forcing managers to lower operating expense ratios. The average operating expense ratio is currently 1.75%, down from 1.95% in 2015.
However, hedge funds are realizing the need to break the cycle and invest in operational efficiency. Fifty-seven percent of managers say their organization is investing, or will invest, in initiatives to improve their operating models. Half of managers surveyed plan to tackle margin pressures by investing in technology.
Forty percent said they plan to invest in automating manual processes, and more than a quarter of managers (27%) have or will be making investments in artificial intelligence and robotics to strengthen their middle and back office.
“Recent advances in technology provide creative solutions for hedge fund managers in supporting operating models that add to the bottom line, rather than reduce it,” said Shadforth.
Shifting talent management priorities
As the industry embraces innovation, the roles and responsibilities of traditional talent are shifting to account for technological and qualitative skills. The ability to compete for the right talent is a strategic imperative for hedge fund managers, particularly in the front office where more than half of those surveyed say they struggle to attract and retain executive investment professionals and more than a third express difficulty in attracting non-executive investment professionals.
Managers are also feeling pressure to provide competitive compensation and workplace culture. Nearly half of managers (45%) have taken steps such as formally surveying or employing consultants to understand what employees are looking for in the workplace. As a result, they have found that collaboration, compensation and work-life balance are key.
“Competition for talent is fierce, as hedge funds compete with others in the space as well as in the growing FinTech community. Hedge fund managers must be attuned to the wants and needs of newer generations of talent in order to attract the right people and foster an unmatched work environment,” said Shadforth.