Hedge funds see institutional credibility as a key element for profitability and achieving growth, according to new research.
The report, Hedge Fund Trends and Challenges: Achieving Institutional Credibility, is to be published next week by SunGard Financial Systems and Aite Group, the analyst firm.
The research, which surveyed 40 senior executives and managers from Tier I and Tier II hedge funds in the US, Europe and Asia highlights how nearly 80 per cent of firms see their investment management infrastructure as critical to achieving more efficient operations.
The concept of institutional credibility is the idea of the ability of an investment firm to instil confidence to the outside world surrounding its operational stability and reliability. Key findings conclude the following challenges stand in the way of institutional credibility
Operational inefficiency: A third of firms surveyed report that operational cost pressures and lack of resources are overly problematic. Additionally, 38 per cent of hedge fund participants find operational efficiency very challenging. The survey found that firms are more likely to outsource parts of their investment management infrastructure than any other operation. Those most likely to outsource cited a desire to help reduce costs and increase operational simplicity.
Need for enhanced risk management: Survey respondents have the most difficulty achieving the desired level of transparency as 75 per cent experience problems as a result of organizational silos that hinder enterprise-wide transparency. A major concern from participants is the need to integrate separate components of risk management to get a complete view of risk from multiple systems and integrate with non-risk systems.
Lack of clarity for investment decision making: 40 per cent of investment decision makers surveyed find generating alpha “extremely” or “very” challenging in the present environment. Although the majority of hedge funds surveyed feel that the ultimate responsibility for performance lies with themselves, the second greatest barrier to success is named at one-third list the lack of operational and investment resources. Over half of investors believe that staying up-to-date with technology may help their firm’s performance. Most operations executives surveyed believe that achieving technology objectives would bring about at least some improvement to investment performance.
Paul Compton, head of asset management strategy, SunGard, says: “The concept of institutional credibility is vitally important and likely to become a standard business metric for clients to evaluate when selecting an investment manager. Clients and prospects now have a heightened interest in the stability and reliability of firm operations, and maintaining systems that will instil confidence in that regard is now essential. Tackling key challenges in the specific areas of operational efficiency, risk management and transparency for correct decision making will certainly set firms on the correct path to achieving institutional credibility.”