Technology is becoming an important factor when hedge fund managers present their investment strategy to prospective investors. The more agile and sophisticated the technology infrastructure, the more appealing the manager will likely appear. And whereas in times past it would have been too much of a capital expenditure to spend big on IT and keep pace with larger hedge fund shops, technology firms like Eze Software are helping to level the playing field.
“The key for us is to make sure we apply technology to the real problems our clients have or anticipate they will have,” says Bill Neuman (pictured), senior managing director of Product and Engineering and responsible for global R&D at Eze Software. “One trend we’ve observed is that hedge fund managers want to focus on their core competence. They want to have a more all-encompassing solution that requires less IT administration; something that gives them a tailored ability to manage the business the way they want without the burden of running on-premise deployed technology.”
Part of the mission at Eze Software is to ensure the continued democratisation of asset management, helping small managers compete by supplementing headcount (i.e. compliance staff) with effective technology.
“Some 70 to 75 per cent of our clients are either hosted or pure cloud,” confirms Neuman. “If fund managers are operating in an environment where they are having to deal with IT issues, it means they’re not focusing on generating differentiated returns for their investors, or achieving operational alpha.”
Indeed, investors are becoming much more demanding at the pre-allocation stage and are looking for things that smaller managers, in particular, would have a hard time providing. These might include transparent processes to mitigate operational risk, guarding against trading errors, the ability to provide differentiated product offerings and so on.
Technology, in this instance, can make a meaningful difference to those managers still in fundraising mode, especially if they use a vendor that can manage the entire investment management lifecycle.
“Investors want fund managers to mitigate as much unneeded risk as possible and also to offer a differentiated product. However, differentiation comes in many different forms. HNW investors are looking for product customisation and discrete control over those investments, as evidenced by the growing number of separately managed accounts. They might want to tweak the strategy, establish unique fee structures, etc,” says Neuman.
Handling such complexity is a big challenge for small and mid-sized hedge fund managers, not to mention other considerations such as tailored reporting as and when an investor requires it. There aren’t many vendors in the marketplace that can handle the allocation complexity of multiple SMAs, multiple portfolios and investment strategies using multiple brokers.
Then there’s the issue of handling an investor restriction layer. How many products in the market have a good enough compliance engine to handle standard regulatory rules as well as customer-specific variations?
“Custom fee structures are yet another strand of complexity. Again, there aren’t many products that can calculate custom fee structures or allow you to tailor them to the degree needed by many asset managers today. These creative fee structures need to be managed by a system, especially if you don’t have a whole back-office team to do it for you. Whether it’s product customisation, compliance, reporting, fee structuring – all of which will likely be considered in an investor ODD – there are very few technology firms who can check the box. It’s increasingly difficult for any asset manager to thrive without a healthy dose of enabling technology; our goal is to make that tech as accessible as possible,” concludes Neuman.