The vast majority of hedge funds have assigned the highest importance to building a well-reputed and trusted institution to assuage fears over operational risk, according to a survey by Aite Group.
In the second part of its ‘Hedge Fund Trends and Challenges 2014’ report – based on interviews with hedge funds headquartered in the US, Europe and Asia, with $900m (€660m) or more in assets under management (AUM) – Aite highlights the increasing importance of engendering ‘institutional credibility’ within the hedge fund sector.
Nearly 80% of the hedge funds surveyed by Aite gave ‘institutional credibility’ the highest importance, possibly in light of the recent underperformance of the sector – it managed to deliver an 8% aggregate gain in 2013 against a 30% rise in the S&P, according to data from Eurekahedge – as well as the recent high-profile closures of QFS Asset Management funds and FX Concepts.
On a cross-regional basis, 39% of those surveyed saw the key element of ‘institutional credibility’ as providing a robust institutional infrastructure to take on complex investment structures, while 23% regarded it as constructing an integrated solution suite allowing firms to leverage technology to satisfy investor and regulatory requirements.
Translating these ideas into spending patterns, 78% of the firms recognised their investment management technological infrastructure as being of vital importance to improving operational efficiency, with enhancing investment management platforms being rated as similarly important to meeting risk-management needs.
In this context, a common concern of hedge fund investment managers remains the accurate translation of their trading objectives through to trade execution, with 36% saying the major obstacles to this seamless trading revolve around the variability or complexity of instruments, communication within firm (including mobile access) and accuracy in pricing and valuation.
Currently, the majority of participant firms have investment management platforms that were at least partially delivered via pure in-house installation or in-house installation with some vendor-hosted components, with only 15% report having completely hosted infrastructures.
Danielle Tierney, an analyst at Aite, said: “Respondent firms tend to employ somewhere between two and 10 different components of portfolio management and accounting infrastructure, with the median number hovering around five, although 15% of firms do employ a single platform spanning the front-to-back office.”
Meanwhile, Deutsche Bank’s annual Alternative Investment Survey found that investors remain bullish on industry growth.
Hedge funds are expected to reach a record $3trn by year-end, up from $2.6trn the year previous, it said.
What’s more, nearly half of institutional investors increased their hedge fund allocations in 2013, while 57% plan to grow their allocations this year.
According to Deutsche Bank, investors are “happy” with hedge fund performance – 80% of respondents said hedge funds had performed as expected or better in 2013, after their allocations returned a weighted average of 9.3% in 2013.
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