Hedge funds transform their cost base
Diarmuid Ryan, global head of hedge fund solutions, BNP Paribas Securities Services
Today’s hedge fund COOs are under more pressure than ever to build their funds’ operating model for increasing scale and complexity, whilst reducing costs. Many want to stop the burden of constant investment in legacy systems. Instead they will seek front-to-back providers who can deploy a shared instance of an order and portfolio management system (OMS/PMS). They will combine this with risk, collateral and treasury management solutions. All wrapped within a service-driven fund administration and outsourced middle office.
As these pressures continue to mount, we expect infrastructure replacement to be a key trend heading into 2020 and beyond. Front-to-back hedge fund service providers will be best placed to give proactive clients a first-mover advantage.
The fund COO will be the hero of 2020, or the scapegoat
Kevin Walkup, president and COO, Harmonate
How close to real-time is your reporting to LPs? That may be pivotal for performance in 2020. Tightening purses, scepticism about actively managed funds, and recession chatter are prompting urgent questions from LPs about transparency.
In response, some funds now offer significantly faster and more transparent reporting on fund data, and they’re setting new LP expectations. Counterintuitively, these funds seem to employ fewer accountants yet turn reporting and closes faster, and have greater data certainty.
For example, with streamlined data operations around 20% of savings have been recorded in year one of such a deployment. Eighty percent of savings can be achieved by year five. Reporting timelines can be reduced by more than 85%. This is the rise of data science for operations.
Despite business tech spending slowing overall, funds and administrators are accelerating more strategic bets, like data operations. Fund administrators will work to pivot in the New Year. Flat fees and doing more with less is forcing layoffs, mergers, and off-shoring. If they can’t cut further they need a better solution.
LPs will change the way they find and benchmark managers in the illiquid alternative space
Anne Anquillare, chief executive officer and president, PEF Services
Just like in the dating scene, matchmaking databases are changing the entry point in fundraising. The population of GPs and LPs in databases is growing, increasing the chances of finding the right match. Investors and consultants will be able to put in selection criteria that matter to them. No longer will investors, consultants and investment firms be limited by who they know or their brand name. As an added benefit, as more investment firms participate in databases, the amount of data will also expand (no one wants to leave selection criteria blank).
Firms will want to demonstrate their commitment to transparency and those with good performance will want to flaunt it. This will also help benchmarking efforts since we will no longer be limited to data from a selected group of quarterly capital account statements. While the databases will be more widely used, it will not replace good old fashion due diligence. You will still need to make sure you have found sound partners.
Predictions from Peter Sanchez, head of Alternative Fund Services at Northern Trust
1. A significant bank player will acquire a significant administrator.2. More firms will continue to be administrators across the entire landscape of alternatives.
(These two predictions are outcomes of continued convergence we’ve seen in the market. Expect to see diversified, expanded operating models addressing the increased sophistication and expectations of investors.)
3. Cryptocurrency will start to be looked as a legitimate alternative class4. Fintech-driven and component-based outsourcing will be prominent ways to deliver new and targeted capabilities to funds and investors (firms will offer trade capture services, cash management capabilities, enhanced financial reporting, waterfall calculations, etc.)
5. As the market starts to stabilise and the bull run begins winding down,investors will look for other sources of alpha– towards the end of 2020, we will see more launches in the alternative space (more specifically, hedge).