The September 2008 market crash has shaken up the hedge fund industry. Investors have withdrawn almost $300 billion from hedge funds over the last three quarters as they look for the industry to justify management fees in the face of significant risk, losses, and the dreaded “gates”. It is only a relentless focus on core competencies to marshal resources toward differentiating strategies that will generate alpha and allow effective risk management and ultimately provide competitive advantage.
Risk management – as the first step toward regaining investor trust – across all facets of a hedge fund’s business has become crucially important as new hedge funds navigate a barely recognisable and heavily regulated post-crash marketplace. Investors demand that managers move beyond VaR in evaluating portfolio risk, and demand increased visibility into operational and technological risks. Concurrently, investors struggle to understand the implications of the surprising correlation of many hedge funds with the movement of the broader market.
This new risk landscape demands innovation of hedge fund managers in the areas that drive returns: portfolio formulation, strategy development and trade sourcing. In response, managers demand technology and business model innovation of their vendors and suppliers to retain a high degree of control while allowing focus on alpha generation. Movement toward sponsored access on the buy side, and to outsourced trade execution infrastructure on the sell side, are both driven by a demand for new approaches and new business models. In fairness, some other related trends are not new. The move to multiple prime brokers, unbundling of research and execution from clearing services, and the increased use of low-touch trading services all preceded current market volatilities. However, the pace is quickening. NASDAQ manages its Market Replay service in the Amazon computer cloud and Marketcetera and the NYSE are going to market with a managed, hosted trading application. Inflexible proprietary systems targeted at the buy side will become a thing of the past as scalability, performance and price pressure drive new approaches. Flexible, manageable solutions that do not swallow up internal resources with maintenance, integration and implementation headaches will provide the only way to survive.
By the numbers
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