Firm Highlights Key Areas Where Operational Improvement Will Help Grow AssetsInfonic AG, a leading provider of back and middle office software solutions to the funds of hedge funds (FoHF) industry, today announced its Top Challenges for FoHFs in 2010. The company highlighted restoring credibility, coping with tougher regulation, managing higher operating costs at a time when fees are down, improving due diligence and risk management, and fighting competition from exchange-traded funds (ETFs) and indices as key challenges FoHFs must address this year.
Infonics Top FoHF Challenges for 2010 are:
1 Restoring FoHF Industry Credibility FoHFs are suffering from a crisis in confidence, due in large part to the fact that they sold diversification and absolute returns, but delivered correlated losses in 2008 and not enough returns in 2009. Clients are questioning the FoHF model and considering a do-it-yourself approach instead. Trust has been shattered and needs to be carefully rebuilt.
2 Providing Clients with Greater Transparency and Liquidity In the past, FoHFs offered liquidity that they didnt have from their underlying hedge fund managers. They thought, wrongly, that redemptions would always be limited and that credit lines would meet any shortfalls. In fact many of the credit lines were withdrawn, liquidity was reduced or closed out by many managers, and clients redeemed in droves. To address liquidity issues, FoHFs need to alter their systems to gain full look-through into their liquidity positions, and provide the transparency and reporting that clients are demanding.
3 Coping with More Stringent Regulatory Rules Global regulators, in a competitive rush to de-risk the market, are applying capital levies across a wider range of financial institutions, along with a potential tidal wave of new rules to accompany them. It is clear that more rules and controls are heading this way from the G20, EU, FSA, SEC,CFTC, OECD and all the other alphabet regulators. FoHFs will need to be prepared to deal with this, both operationally and from a cost perspective. Costs of meeting the new requirements will hit the profit and loss of all FoHFs, so firms must take action to automate and streamline the way they deal with new regulations.
4 Pressure on Fees Given the crisis in confidence at FoHFs, these firms are facing downward pressure on fees. Clients will not pay for poor performance, so there are few performance fees in the pipeline. Management fees are under pressure as well. Two-and-20, the traditional fee approach, is dead or dying.
5 Achieving Better Due Diligence and Risk Management – Risk has moved from a four letter word to a theological concept. With Madoff, Weavering and other frauds and failures, it is clear that there was a gap between FoHF marketing presentations and the reality. This will need to be changed. Before, pitches had wrongly morphed into: alternatives deliver absolute returns in all market conditions and are un-correlated with traditional assets like stocks and bonds. To address due diligence and risk management, firms need to establish processes that dig deeper, identify problems sooner, and that actually work when it matters most.
6 Fighting Competition from ETFs and Indices Why bother with FoHFs when you can create your own via ETFs, indices and managed accounts platforms? Its cheaper and more transparent. To address this, FoHFs must increase the value delivered to clients. Some are even adding advisory businesses.
D.C.