Digitising the workforce
This article first appeared in the April 2023 Technology Insights Report
Many hedge fund COOs appear resistant to the idea of deploying AI – and similar types of disruptive technology – inhouse. But that’s only part of the picture.
On the surface, hedge funds’ uptake of disruptive technologies within their operations appears slow.
According to Hedgeweek’s survey, only 14-16% of hedge fund managers use either artificial intelligence (AI), big data, or blockchain as part of their operational functionality (see fig. 3.1), despite the potential for improved transparency and efficiency, reduced costs, and stronger risk oversight.
Further analysis finds the adoption of blockchain enhancements for operational alpha particularly mixed. Crypto-focused firms inevitably are the biggest users: almost one-quarter (23%) of the digital assets hedge funds within our survey pool use blockchain technology to improve business operations, with some 85% using it to improve their investment strategy.
By comparison, take-up within the hedge fund mainstream remains comparatively patchy – 33% of all managers use the blockchain for performance reasons, 14% to strengthen operational functions.
Of particular note to some observers has been the seemingly sparing use of AI in the middle- and back-office. Indeed, about a quarter (23%) of large hedge funds surveyed use AI/machine learning for operational purposes. That number dips to under 20% for firms with smaller AuMs (see fig. 3.2).
“I’ve been surprised at how few hedge funds have been incorporating AI technologies into their businesses,” admits Benjamin Truitt, CEO of Spire Fund Advisory, a US-based hedge fund manager that uses AI in its investment strategy and operations.
However, Truitt also suggests that the launch of OpenAI’s ChatGPT last year is proving to be a turning point. “AI is now something people can touch and feel,” he explains. “It [ChatGPT] is helping investors – and managers – get more comfortable with the technology.”
Hedgeweek research suggests ChatGPT is already having a material impact on the way hedge fund businesses operate. Nearly 15% of all hedge fund managers surveyed said they currently use ChatGPT (see fig. 3.3), which could be considered high given the short runway: the technology – which can quickly summarise lengthy documents and provide in-depth responses to often complex questions, among other things – debuted in November 2022, just a few months before our survey.
A similar proportion of all survey respondents are actively exploring ChaptGPT but have not yet adopted it.
If both camps are outweighed by the 36% with no plan to use ChatGPT in their business, the fact digital assets managers – frequent first-adopters of advanced tech – have a higher rate of respondents with no plan to use it (46%) supports the idea that ChatGPT could have a greater bearing at less tech-savvy firms.
But to focus on the in-house application of disruptive technologies within hedge funds’ operations is to see only part of the picture.
For most managers, the benefits of AI, machine learning strands like Robotic Process Automation (RPA), and blockchain within operations will be delivered – and shared – by third parties, notably outsourced service providers.
Arguably, the trend for tech-enabled outsourcing gained traction in the late 2010s, as new regulation mounted globally and many hedge funds – including some of the industry’s biggest firms – realised their operational infrastructure was inadequately positioned to process the new requirements and scale for future ones.
Today, heightened demand from hedge funds for tech-enabled middle- and back-office solutions is evident in product and service development. In the six weeks since the start of March alone, the Hedgeweek platform has captured five news items about new or enhanced third-party solutions marketing the use of AI, ChatGPT and/or alternative data.
As a result, though the number of hedge funds reporting in-house deployment of disruptive technologies to enhance their operations is, and will likely remain, relatively low, the number with access to the benefits of such technologies is poised to accelerate as more and more enhancements come to market.
Indeed, 2023 could prove a pivotal year for hedge funds’ use of AI in their back-office setup – if only indirectly.
SS&C, one of the industry’s largest managed service providers and fund administrators, made headlines last year by acquiring UK-based robotics RPA company Blue Prism. The investment technology specialist has since made progress in incorporating Blue Prism’s RPA into its servicing offering.
According to Aani Nerlekar, a Senior Director in SS&C Advent’s Solutions Management and Consulting division, the group is integrating RPA into its workflows and hopes to give investment manager clients access to the benefits of Blue Prism later this year.
Nerlekar notes many hedge fund operations professionals are still sceptical about deploying AI in-house. But, he says, demand is increasing for the benefits of digital workers as more hedge funds find operational functions to outsource, such as reconciliation (see boxout).
Two final hurdles
This sentiment chimes with the findings from Hedgeweek’s November 2023 Insights report, which showed that most heads of the operational function at hedge fund firms view their role as a mix of people, process, and technology management, in contrast with just 8% who see their position as chiefly tech management.
This also suggests hedge funds are retaining a degree of human oversight and control in business and operational functions – a trend that Nerlekar is also seeing.
If one obstacle preventing some hedge funds fully embracing AI within their operational setup is lingering discomfort with the idea of replacing human workers with AI, a second is overreliance on legacy technology.
While many managers are keen on pursuing the latest in disruptive technology, some remain hindered by old and inflexible systems, coupled with a lack of in-house technical talent that needs to be addressed.
Nerlekar believes hedge fund firms using legacy technologies struggle to evolve their business and provide the best returns to investors.
He explains: “A hedge fund manager’s goal is to source investment opportunities and generate alpha. As tech specialists, we aim to constantly evolve our technology and modernise our platform using the latest AI and machine learning advances. To that end, when we work with a firm with existing legacy technology, we recommend partnering with a technology specialist and complementing a modern technology platform with additional managed services offerings.”
Technology modernisation and managed services are a resonant pitch in today’s volatile trading conditions. The prospect of evolving a vast and disparate network of legacy technologies while trying to monitor and capitalise on unprecedented market movements will likely concern even the most agile fund managers.