To investigate the extent to which technology is disrupting the financial services sector, KPMG recently partnered with the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA) to determine how managers are responding.
More than 100 hedge funds with approximately USD300 billion in AUM responded to the online survey and the findings of the report were clear: 94 per cent of managers, for example, feel that technology will have an impact on their business over the next five years. Some 90 per cent identified improved controls and compliance as a primary reason for investing in technology, with 78 per cent and 58 per cent expecting technology to deliver enhanced reporting and improved transparency, respectively.
Commenting on the findings, Craig Bridgewater (pictured), Head of Investment & Banking, KPMG (Bermuda) says: "There is now a huge volume of data that managers need to work with to comply with regulation and technology is able to introduce various efficiencies to manage that volume of data. More broadly, we see the rising influence of technology in relation to blockchain (USD1 billion was spent in 2016) and the rising popularity of robo-advisors as key trends coming through today."
Artificial intelligence and robo-investing have become prominent themes in the last few of years, signaling the rise of machine-based quantitative investing. KPMG's survey notes that 58 per cent of managers believe that these disruptive technologies will have a medium to high impact on the way funds are managed in the future.
"There are some interesting debates as to where innovation should occur and what it might look like," comments Chris Eaton, Senior Manager with KPMG (Bermuda) and the KPMG Islands Group Cyber Security Lead. "2016 was quite a tough year for hedge funds so technology for efficiency gains is quite interesting but the application of innovation is really the acid test question: where should that innovation be made? Will people look to outsource or co-source with platforms? Will they look to innovate their analytical capabilities to find new ways to present fund information?"
With respect to outsourcing, smaller funds are more likely to go down this road because of the cost-efficiency gains on offer. According to KPMG's findings, some 50 per cent of large funds prefer to develop technology internally. As Eaton points out, this largely depends on what is being outsourced and for what purpose:
"If it's outsourcing transactional volume that makes sense because there is no differentiation gain. If it relates to how you are innovating on the front end then that is a different question. There is true differentiation occurring but in an informed manner; some is kept in-house, some is outsourced."
Larger asset management houses have unique needs to deliver their strategy and they have the ability – thanks to resources and level of AUM – to develop bespoke systems internally for investor reporting, "as well as internal reporting for the portfolio management teams," says Bridgewater. "I hear clients talk often about shortening redemption cycles as being a competitive advantage and I do think that's an area of value-add."
According to BI Intelligence, robo-advisors are expected to control USD8 trillion in AUM by 2020 and are set to make a significant impact over the next few years, shaking up the fund-management industry (http://uk.businessinsider.com/4-reasons-robo-investing-growing-2017-1).
"Robo-advising is opening up a new distribution channel. The younger generation sees less value in sitting down and talking to a fund manager, they want to access information themselves and I think that is why robo-advisors are becoming more of a necessity on the retail side. On the institutional side, there is still a reliance on human discretion. I think there will be a range of asset managers, some of whom will adopt robo-investing more than others," suggests Bridgewater.
One other key aspect of technology is cybersecurity, with 60 per cent of managers thinking first and foremost about data security. Regulators such as the SEC are imposing financial penalties on registered investment advisors that fail to protect their investors' data, and fail to introduce robust cyber controls and processes to mitigate the threat of data breaches.
This is set to become even more of a priority, however, when the European Union introduces the General Data Protection Regulation in May 2018.
"The impact of GDPR could have tremendous financial implications. Those organisations who fall within the scope of GDPR (which will impact non-European institutions if they have EU clients) face a potential fine of four per cent of global revenue. Therefore, managers will need to treat personally identifiable information carefully and have proper policies and procedures in place to protect it. I think GDPR will broadly raise the benchmark of the quality of cybersecurity controls because of the impact that this regulation have on an organisation if they get it wrong," explains Eaton.
In conclusion, Bridgewater says that privacy legislation has been introduced into Bermuda recently to reflect the changing regulatory environment.
"Bermuda is well served with its service provider community – many of which are parts of international groups – to answer any questions relating to GDPR and other cyber-related issues. Wherever the lead jurisdiction is from a regulatory perspective, that best practice tends to get picked up and shared with our clients here in Bermuda."
