NEW YORK, Nov. 14, 2017 /PRNewswire/ -- A majority of
hedge fund managers (57%) are innovating to improve their
operational efficiency in response to market disruptions and to
avoid falling behind the industry, according to
the EY 2017 Global Hedge Fund and Investor Survey:
How will you embrace innovation to illuminate competitive
advantages?
The 11th annual survey found that hedge fund managers are
actively seeking innovative ways to improve operational efficiency
and grow their asset base, as pressure on margins shows no signs of
abating. Meanwhile, investors also say they recognize the need for
managers to innovate, with 30% noting they want managers to do so
in the front office.
Investors are looking for managers who can effectively implement
next gen data to gain an advantage, according to the survey.
Managers are beginning to notice that effective use of data is a
key advantage, and nearly half say they are using non-traditional
data to support the investment process. To keep pace with investor
appetite for new products and innovative offerings, managers are
not only reimagining their investment strategies, but are also
focusing on hiring and retaining talent that is experienced in
technology and data.
Michael Serota, EY Global Hedge
Fund Services Leader, says:
"The pace at which the hedge fund industry is being disrupted
continues to accelerate, as advances in technology bring new
threats, but also opportunity. The evolving landscape forces
managers to not only be reactive but also proactive in identifying
novel solutions that allow them to deliver alpha and remain
competitive. Managers of all sizes are embracing innovation to
stand out in a crowded hedge fund universe and to achieve a common
strategic objective: growth."
Managers continue to grapple with changing investor demands
and competition from other alternative asset classes
Consistent with last year's survey findings, fewer investors
plan to increase their allocations to hedge funds. Of those
surveyed, 15% of investors note they are more likely to decrease
allocations in the next three years versus 11% of investors who
indicate they plan to increase allocations. However, the vast
majority – 74% of investors – still expect to keep their hedge fund
allocations flat.
Alternative investments continue to spur competition, as 40% of
investors say they plan to shift certain hedge fund assets to other
alternative asset classes and 20% say they will begin using
non-traditional hedge fund products for the first time. In
particular, private equity is experiencing a dramatic shift in
demand, as 76% of investors currently allocate or plan to allocate
funds to this alternative asset class in the next two years.
To attract and retain investors, the survey reveals, more than
half of managers now offer separately managed accounts (56%) and
funds with customized fees and liquidity terms (52%), and
two-thirds of managers have adopted or are considering
non-traditional fee structures for growth (66%). The largest hedge
fund managers have been able to keep momentum, making the largest
investments in non-traditional product development.
Natalie Deak Jaros, Americas
Co-Leader, Hedge Fund Services, Ernst & Young LLP, says:
"Investors are turning to customized products for a number of
compelling reasons. Managers of all sizes must engage in dialogue
with their investors and align product offerings that are
responsive to shifting investor needs."
Investors look for managers to innovate the front office to
generate more alpha
Investor expectations reflect the general excitement around
FinTech and the advancements in data set analytics. Thirty percent
say they would like to see hedge funds become more innovative
within front-office operations. While investors say only 24% of the
hedge funds to which they currently allocate use non-traditional or
next generational data and tools, they expect that number to rise
to 38% in three years. Hedge funds are starting to see the benefits
of non-traditional data, with 46% saying they currently use this
data. As an example, managers can deploy software to extract data
from multiple earnings calls that can help evaluate information
more quickly to inform the investment process.
The landscape is quickly changing in response to investors'
demands, as managers are implementing innovative approaches to
improve operational efficiency (57%), attract capital (36%),
attracting/retaining 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%). Data types of interest include social media
data, private company data and credit card data.
Managers are looking to alleviate continued margin pressures
by investing in technology to innovate their operating
models
Until now, most managers have responded to added complexity,
increased product offerings and reporting requirements with
increased 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 say 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.
Zeynep Meric-Smith, EMEIA Leader,
Hedge Fund Services, Ernst & Young LLP, says: "Managers with
growing businesses will often need to add to their headcount to
support the business, but modern advances in technology provide
helpful solutions in supporting operating models that add to the
bottom line, rather than reduce it."
The need for tech skills and increased competition for talent
are leading to a shift in 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 survey reveals investor
confidence in future talent plans is a critical component in their
decision to allocate. For their part, 30% of managers say they have
changed the profile of employees they seek to include these new
skill sets.
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 (54%) say they
struggle to attract and retain executive investment professionals
and more than a third (37%) express difficulty in attracting
non-executive investment professionals.
Managers are also feeling pressure to provide competitive
compensation and purpose-driven workplace culture. Nearly half of
managers (45%) say they 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.
Elliott Shadforth, Asia-Pacific
Leader, Wealth & Asset Management, Ernst & Young LLP, says:
"Competition for talent is fierce, as hedge funds compete with
others in the space as well as Silicon Valley and the FinTech
community. Hedge fund managers must be attuned to the wants and
needs of newer generations of talent to attract the right people
and foster an unmatched work environment."
The complete survey is available at ey.com/hedgefundsurvey.
Notes to Editors
About EY
EY is a global leader in assurance, tax, transaction and
advisory services. The insights and quality services we deliver
help build trust and confidence in the capital markets and in
economies the world over. We develop outstanding leaders who team
to deliver on our promises to all of our stakeholders. In so doing,
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EY refers to the global organization, and may refer to one or
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of which is a separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee, does not provide
services to clients. For more information about our organization,
please visit ey.com.
This news release has been issued by EYGM Limited, a member of
the global EY organization that also does not provide any services
to clients.
About the EY Global Hedge Fund and Investor Survey
The purpose of this study is to record the views and opinions of
hedge fund managers and institutional investors globally. Managers
and investors were asked to comment on innovation and its impact on
changing strategic priorities, the use of big data as a
differentiator in the front-office, capital raising, expenses and
non-traditional fee structures, disruptive technologies, evolving
operating models, the changing face of talent management and the
future landscape of the hedge fund industry. From July to
September 2017, Greenwich Associates
conducted 106 telephone interviews with hedge funds representing
nearly $1.3 trillion in assets under
management. Research also conducted 55 telephone interviews with
institutional investors (fund of funds, pension funds, endowments
and foundations) representing more than $1.6
trillion in assets under management, with roughly
$260 billion allocated to hedge
funds.
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SOURCE Ernst & Young