➾ Hedge funds will increasingly begin to look like traditional investment managers
➾ Traditional investment managers will continue to adopt some hedge fund practices
➾ Hedge fund operational and reporting requirements will change
➾ All investment managers will have heightened demand for enterprise-wide data for reporting and risk management
➾ Investment managers (traditional and alternative) will perform more rigorous due diligence on their service providers
➾ Service providers will have new opportunities
➾ Service providers may face new challenges
➾ Hedge funds will look to hire more staff with traditional investment management backgrounds
Hedge funds will increasingly begin to look like traditional investment managers
We foresee a high likelihood of regulatory oversight and registration. From both investors and regulators, there are demands for greater transparency and reporting. Most hedge funds are already finding themselves subjected to increased scrutiny of operational infrastructure and risk. Across many firms, there is growing acceptance of separate account management. Meanwhile, both investors and funds are placing greater emphasis on compliance. Investors are also demanding -- and getting -- lower fee structures.
Traditional investment managers will continue to adopt some hedge fund practices
Some will launch hedge funds and others will acquire hedge fund firms.
Hedge fund operational and reporting requirements will change
There will be a growing requirement for hedge fund managers to maintain shadow records (separate from prime brokerage and fund administration records) and the rise in separate accounts ultimately will compel hedge funds to create and track performance composites. This, in turn, will result in increased demand for hedge funds to comply with the Global Investment Performance Standards (GIPS®). Hedge funds ultimately may begin to take on trade affirmation responsibility. And funds will face increased reporting requirements, including ‘look-through’ reporting and possible daily valuation for some strategies.
All investment managers will have heightened demand for enterprise-wide data for reporting and risk management
This demand will cut across all strategies (e.g., large cap value, global fixed income, Asian long/short equity, distressed) and all investment vehicles (e.g., mutual funds, separate accounts, SMA ‘wrap’ accounts, hedge funds, private equity funds), even if they are managed by different investment teams or subsidiaries or are running on different investment accounting platforms. Investment managers will want to include sub-advised portfolios as well.
Investment managers (traditional and alternative) will perform more rigorous due diligence on their service providers
Prime brokers, custodians, fund administrators, auditors and software vendors should prepare for increased due diligence and managers should focus on the initial and ongoing oversight and review of key service providers.
Service providers will have new opportunities
These will include increased demand for investment managers to track traditional separate accounts and hedge funds on the same platform or to implement data warehouses. The rise in separate accounts as well as the call for shadow accounting will prompt hedge funds to seek investment operations outsourcing (distinct from fund administration). We project an increased demand for systems (investment accounting, partnership accounting, order management, pre- and post-trade compliance monitoring, trade communication and confirmation matching, performance measurement, performance attribution, composite management, reporting, document management, data warehouse, billing) from firms that never created an internal infrastructure or whose infrastructure does not support separate accounts, multi-prime environments and/or hedge funds (in the case of traditional managers that acquired and/or expanded). We will see increased demand for consulting services, particularly in the areas of outsourcing evaluation, system / vendor selection, implementation services, operational reviews, due diligence preparation, GIPS® verification, compliance reviews and mock audits. Demands for operational due diligence of all investment managers will increase. Not only will more investors conduct due diligence reviews, but the reviews themselves will become increasingly detailed.
Service providers may face new challenges
It is possible we will see regulatory oversight of fund administrators. In time there will be greater requirements arising from investment manager due diligence on fund administrators, prime brokers, custodians and auditors. Smaller providers will potentially be viewed as lacking independence from their largest clients. We could see potential demands to segregate service providers (fund administrators, custodians/prime brokers, investment operations providers). And we anticipate potentially rising insurance costs.
Hedge funds will look to hire more staff with traditional investment management backgrounds
On average, middle- and back-office employees from the traditional investment management space have more industry experience and lower salaries than those with hedge fund backgrounds.