A new report entitled ‘Alternative Investments 3.0 – digitize or jeopardize’ from KPMG International and CREATE-Research finds that digital technologies are radically reshaping the alternative investment industry, but a large majority of hedge funds and private equity firms appear to be too slow to respond.
The report was based on a global survey of 125 hedge funds and private equity firms and conducted by KPMG International and CREATE-Research.
While 98 per cent of respondents say ‘business as usual’ is not an option, at least three out of five respondents said they are still at the nascent stage of ‘awareness raising’ with respect to revolutionary technologies that could potentially transform their businesses.
“What the internet did to the music business, digitization will do to the alternatives industry – it’s not a question of if, but when. The big players are well ahead, but the rest face an Everest of a task,” says Anthony Cowell, Head of Asset Management, KPMG in the Cayman Islands, and the report’s co-author.
Less than a third of respondents said they are at the implementation stage for key innovations, while for both hedge funds and private equity, advanced technologies such as blockchain and robo advisers have been implemented by 3 per cent or fewer.
“Only a minority of firms we surveyed are deploying innovations designed to give them a competitive edge. With growing pressure on costs and the demands of digital-savvy millennials, this will have to change markedly,” adds Al Fichera, Global Head of Alternative Investments, KPMG International.
Indeed, when asked which factors will accelerate the pace of digital innovation in their business over the rest of the decade, respondents cited market-driven factors, including growing cost pressures (58 per cent), changing investor needs (51 per cent) and fees and charges, becoming a major differentiator (30 per cent). They also cited client-driven factors such as growing social acceptance of digitization, and end-investors becoming more demanding (37 per cent) and more financially and digitally savvy (36 per cent).
Holding back the pace of digitisation are a number of technology and business-related factors, the report says. On the technology side, they include cyber security (58 per cent), legacy IT systems (43 per cent), and the high cost of digital innovations (42 per cent). On the business side, they include senior executives being too focused on day-to-day matters (40 per cent), regulatory issues (39 per cent) and low risk appetite in the corporate culture (31 per cent).
The survey identified activities that are especially ripe for disruption in the front, middle and back offices. They include portfolio risk management, research and securities selection, alpha generation, deal flows, risk and compliance and fund accounting.
The survey also offers tips to business leaders on how their firms can ramp up the pace of innovation. It includes collaborating with fintechs, forming strategic partnerships with third-party administrators, improving the human–machine interface to harvest the benefits of machine learning, and broadening and deepening the talent pool to upgrade in-house technology capabilities.
“There are no easy options, but to do nothing is the worst. Alternative managers must either embrace the revolution that is sweeping through their industry or risk being sidelined,” says the survey’s co-author, Professor Amin Rajan, CEO of CREATE-Research, based in London.