Service providers of critical support in challenging times

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By A Paris – As the world scrambled to transition to remote working, service providers played a critical role in easing the shift among hedge funds and alternative investment managers. In this, they proved to be of vital support to ensure managers continued to trade and also serve their clients without interruptions.

The winners of this year’s Hedgeweek Awards show they are nimble and can adapt their solutions to managers’ changing needs. In a fast-paced industry where technology demands, sustainable investing considerations and regulatory requirements are constantly on the rise, having access to partners who can alleviate some of that administrative and operational burden allows managers to focus on what they do best – investing and generating alpha.

Although the global Covid-19 pandemic caused mayhem in investment markets, hedge funds overall are proving to be resilient. The year is seeing wide dispersion in performance with relative value strategies providing the best risk-adjusted returns, according to data provider Preqin: “For some managers, market timing has been more of a challenge as markets become increasingly disconnected from fundamentals. For relative value strategies, however, which exploit market divergences without having to make directional bets, this may have proved advantageous…these strategies have successfully mitigated downside risk in relation to the returns they have been able to generate.”

Hedge funds overall incurred losses of 0.65 percent in September, demonstrated by the performance of the Preqin All-Strategies Hedge Fund benchmark. However, this was clawed back in October which led to a year-to-date return of 5.39 percent.

Service providers to the hedge fund industry have always been instrumental in driving operational and administrative processes. This year however, their role was arguably brought into sharper relief. 

Tom Kehoe, global head of research and communications at the Alternative Investment Management Association (Aima) points to the growing influence of technology: “Every industry in the world is being disrupted or will soon face disruption by technology. The advent of cutting-edge statistical and computational tools is increasingly pushing the hedge fund industry toward a more quantitative outlook. Over the coming years, machine learning and the use of alternative data will become steadily more important for hedge fund firms until it becomes a necessity.”

The firms featured in this report are at the forefront of these developments. They provide necessary administrative, technological, and operational assistance to managers, enhancing their efforts to generate return for their investors.

Although engaging with technology is not a new phenomenon among managers, the way they are doing this is changing. For example, Robert Longden, Senior Vice President at Arcesium says investment managers have started to focus more on data integrity and data quality when looking to automate processes and engaging with technology.

Jill Calton, Executive Vice President and Director of Alternative Investments at UMB Fund Services highlights: “We expect the future to continue to be centred around technologies that allow funds to scale quickly and improve the overall investor experience. Technology demands have increased over the past year, perhaps heightened by the move to a remote work environment.”

Without a doubt, the pandemic led to a number of key characteristics in managers’ work practices to become more important. Given the increased incidence of remote working, security has been top of mind.

“Covid-19 and the impact of social distancing have become the ultimate tech disrupter, driving investment and digitalisation innovations,” comments George Ralph, managing director, RFA, ”This growth has been reflected in an increase in the need to manage distributed workforce transformations and a need for new solutions for business productivity, collaboration, and mobility via the cloud and data management.”

Due diligence processes have also been turned on their heads as investors are having to rely on virtual meetings with their managers rather than on-site visits. This has led to fund raising challenges for emerging managers. Although the volatile environment has been positive for these firms, the investor reluctance to hand down mandates to a manager they have never met in person may be stymieing their growth.

Looking ahead, technology solutions and operational support will continue to be a keystone of the hedge fund eco-system, particularly as managers strive to take advantage of the investment opportunities fuelled by the persistent global uncertainty. 

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Mark Kitchen
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