While the current market environment presents challenges for institutional investors, it also offers hedge funds alpha opportunities unseen for years. To maximise their return potential in this environment, hedge funds are investing in more data and further developing their tech stack to help scale their operations.
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While the current market environment presents challenges for institutional investors, it also offers hedge funds alpha opportunities unseen for years. To maximise their return potential in this environment, hedge funds are investing in more data and further developing their tech stack to help scale their operations.
“The macroeconomic environment with increasing interest rates, soaring inflation, heightened geopolitical tensions and uncertainty surrounding central bank policy has resulted in higher market volatility and more pronounced trends in asset prices,” says Daniel Leveau (pictured), VP investor solutions, SigTech.
After a decade of institutional investors primarily focusing on capturing market beta, the hunt for alpha has returned. Many investors have reduced their return expectations for the equity and fixed income markets, identifying the need to tap into additional sources of return to meet return targets. Here, many hedge fund strategies can play a central role.
Indeed, these are ideal market conditions for hedge funds to generate alpha and underscore their worth. This has resulted in increased demand for unconstrained investment strategies in general and for macro strategies specifically. It has also highlighted how instrumental an investment manager’s quant infrastructure is in the development and maintenance of an edge in alpha generation.
Supporting this, Leveau points to the ongoing quantification of the hedge fund industry: “One of the most noticeable trends in the industry is discretionary managers embracing the use of new technological advancements to – congruent with most other industries – profit from the digitisation of key activities.”
Easy access to powerful technology allows discretionary investment managers to become more technology-driven investors. According to Leveau, these funds are showing a growing propensity to systematise parts of their investment process, be it in the widening of their product range to include quant funds or the integration of systematic analytics into their investment processes.
Leveau addresses the role a manager’s infrastructure plays in delivering attractive returns to clients: “To unlock the true value of financial data, funds need access to a powerful research environment and backtesting engine offering flexibility across asset classes. Effective infrastructure development unifies oftentimes fragmented processes and fosters firmwide collaboration.”
In view of this, hedge funds are increasingly partnering with specialist third-party providers, enabling the funds to focus even more on their core activity of generating alpha. The constant development of new technologies makes it increasingly difficult and costly to sustain the internal construction and maintenance of research infrastructure.
Leveau remarks: “We believe that there is going to be increased specialisation in the hedge fund industry, with a move away from hedge funds doing everything internally. Instead, the trend for outsourcing to third party specialist providers, to ensure managers gain access to the right technology and data to support their investment processes, will accelerate.”
