by Tiffany Uffleman, Senior Marketing Manager, IPC
Hedge fund industry assets continue to grow and are set to reach an all-time high in 2017 for the ninth year in a row.* Despite sustained growth, the industry is not without its challenges. This includes the sizeable outflows of assets by large institutional investors such as pension funds, where there is ongoing pressure on these investors from media, union employees and politicians to communicate why they invest in hedge funds and how their performance should be evaluated. Funds are being scrutinized to reduce management fees which in turn causes them to look inward at operational costs.
Based on conversations with industry analysts as well as our involvement with industry associations we find that in order to attract new and maintain existing large institutional investors, it has become increasingly more important for hedge funds to reduce IT spend. As software as a service (SaaS) cloud-based communications platforms become more accessible, the belief is that the industry will begin deploying these types of offerings to reliably and securely access their counterparties as well as communicate internally amongst various roles and across geographically dispersed locations.
We’ve also found, by talking to clients, that funds are moving toward different strategies due to market conditions to generate higher returns. There has been a change in asset allocation among managers based on relative performance and varying strategy preferences. We are also seeing a move away from long only benchmarks since capital market valuations are hovering around all-time highs and there are concerns around the housing market, China, the US banking system and some of the weaker EU economies.
As the pressure mounts to expand into new strategies and asset classes, the belief is that it is now more important than ever for hedge funds to have secure and reliable connectivity to the host of counterparties required to operate their business and generate superior risk-adjusted returns for their investors. Access to a wide ecosystem of market participants such as buy-side firms, sell side firms, trading platforms, market centers, liquidity venues, interdealer brokers, application and market data providers and clearing and settlement services allow seamless access to liquidity and services across the various asset classes and strategies in which they invest. Some common examples include:
- Fundamental and technical analysis require connectivity to market data providers and contacts at the sell side
- Connectivity to prime brokers for financing, securities lending, reporting, settlement, client service, and short selling.
- Execution with brokers and banks require reliable, latency-sensitive connectivity
Innovative and nimble hedge funds will certainly have an advantage by quickly adopting new cloud-based communications technology as a way to access the ecosystem on which they rely on to manage their funds and generate alpha for clients.