Hedge Fund Industry Trends... From the Fund-Manager Lens

Monday, January 12, 2015

Agecroft Partners’ 2015 Top Hedge Fund Industry Trends just hit the mark. We delved into and related a few of the trends back to the impact the right hedge fund operating system can have on your ability to attract the right institutional investors and perform in 2015. Here are views on some of the top hedge fund industry trends... from the fund manager-lens.

Greater Alpha Due to Higher Volatility

For the financial markets, 2014 was another year of change as sentiments moved forward, strategies and vehicles were intensely scrutinized, and regulation remained uncertain. As 2015 was being ushered in, our conversations with fund managers centered on the importance of real-time access to all data (historical / present-day / forward-looking) driving the analysis and investment decisions.

If Agecroft’s analysis holds true, you will need accurate, real-time views that are accessible everywhere to allow your investment team to see how:

the strategy is performing as positions update,
historical numbers and analysis over time, and
hidden risks and opportunities.

The right hedge fund operating system should provide your business with all of these capabilities in unison—contributing to a smarter investment strategy while increasing the value you bring to client relationships.

Smaller Managers Will Continue to Outperform

Entering 2014, the highest concentration of assets flowed to the largest managers with the strongest brands. By the end of Q3, there was a shift— for the first time since 2009, inflows to small and mid-sized firms exceeded the inflows to the largest hedge funds in the industry. In line with that shift, some of our industry’s biggest performances in 2014 came from smaller funds.

In a market dominated by the Bigs, the smaller outfits are now attracting the right institutional investors, namely the endowments and pensions, whose measuring stick includes performance and pedigree, alongside suitable infrastructure and controls to dynamically manage larger buckets of AUM. At any stage of a fund’s maturity, the same investors expect to see you have the operations and controls in place to:

Play nice in a multi-prime and SMA world
Analyze and report on investment activity in real-time, while at or away from the desk
Accurately tie out and retain all investment/trading activity for future use
Provide follow-the-sun business continuity and disaster recovery

For managers under a billion in AUM, these requirements can be the harness that weighs down the forward movement of the fund—limiting the credibility discussion. This is where a hedge fund operating system comes into play – the right system will incorporate these workflows seamlessly in automated processes, backed by outsourced people and technology, while keeping your costs low and credibility high, and ensuring accurate, your team has real-time mobility across data sets and time zones.

Relative Performance Compared to Peers

Sometimes a direct quote from fund managers like yourself on how the right infrastructure has created a divide between themselves and their peers in the investor-eye, are worth a thousand of our own words:

“Once we received a call from a managed account client, who had their money parked in two funds. He asked why we were up .1x, while the other fund manager was down .3x. Rather than spending the manpower and time building a response using off-the-bar/archaic spreadsheets, I hit a couple of buttons and responded in a matter of seconds. Their response was "If we send you a couple million now, can you get it to work by 4 o'clock?" The point is having the ability to answer investors’ questions when it matters. We find it liberating to have the tools to generate analysis and reports in real-time, every day with profound data to back up and support allocation decisions. And my clients have the same luxury.”

Founder; Event Driven Fund

"Before we even thought about trading any instrument, we had to have the infrastructure in place to ensure that each position could be quickly accounted for with respect to not only static risk calculations such as value-at-risk, but also our own active and dynamic risk slide, which shocks the portfolio through a multi-variable process and gives our team a clearer picture of the real risk in our portfolio."

Founder, Commodity Trading Advisor

More Hedge Funds Shutting Down

Regardless of the term used, hedge funds—whether start-up, emerging, emergent—have no easy task. A record number of funds liquidated last year. In fact, even before they got out of the gate, many had to reengineer after their first execution – and either rethink their methodology or seek out new operational tools that fit institutional investor expectations and budgets.

Unfortunately, this is becoming the norm and the market now expects failure-to-launch funds to make up a good percentage of the 1,000 or so enterprises that will exit our space this year. . And it’s not only about cost. It’s a tough spot in 2015 for funds to get the engine running – overhead costs are a real challenge, even with smaller headcount (or a single headcount), and the ability to stay competitive amongst the crowd is becoming more challenging by the day. But, in order to spend less on ops and more on implementing the strategy, every startup fund or emerging manager needs 4 things, which we blueprinted here in our last blog.

Equip your fund with the right hedge fund operating system today-- reach out to us at marketing@liquidholdings.com to schedule a demo. And, to read Agecroft’s 2015 trends blog in its entirety, check here.