Guest Contributor: Chris Grandi, Founding Principal, Abacus Group
We are two months into 2012, and already our expectations, based on what we experienced in the prior calendar year, are being exceeded. Although this may have been a low bar to overcome, as returns were in large negative across the alternative asset class in 2011, the New Year does bring us new promise and enthusiasm. The following are some trends we are seeing in the New Year, and some thoughts on the impact they will have in our industry:
The Emerging Manager is back
Investors have spent several years shunning risk perceived in smaller, newer fund managers, and have been investing in well established hedge funds. 2011 showed us that size does not always matter, and the sub-par returns of several large funds has left allocators seeking alpha with the new emerging mangers. This is a cycle that is bound to reverse itself in the future, as cycles often do. However, for 2012 the new manager is appealing and correspondingly we are seeing an influx of newly launched hedge funds with seeding capital looking for more of them.
The cloud is here to stay
Hedge fund managers are outsourcing their services to providers who manage them in the cloud at an increasing rate. For years, the hedge fund industry has questioned the performance and security of these solutions , but it appears that the so-called “Chasm Has Been Crossed”. While concerns still exist, the majority of new fund managers and most of the existing funds are adopting cloud services in some form. The economic benefit and the reliability of these services have become accepted by the hedge fund community and their investors. Those managers who spend millions of dollars to build a data room on the 30th floor of their 5th Avenue office will see scrutiny with respect to their decision to do so.
Form PF will drive a change in work-flow.
While hedge funds have known and accepted that increased regulation is coming to this industry, this year’s Form PF requirements will be the greatest driver of change in hedge fund operations we have seen in over 10 years. The stringent reporting requirements will catalyze work-flow evolution in most funds, especially those over $1.5B in assets. The additional work and services required to comply with the Form PF standards will add additional cost to hedge fund operations. Hedge fund managers will quickly realize these new tasks will be accomplished in a more efficient and economic manner if outsourced to a third party such as their fund administrator, compliance consultant or technology provider. In all cases, the increased cost will force fund managers to strategically deal with the cost associated with increased regulation.
Social Media cannot be ignored
Much has been said about how Facebook and Twitter are being utilized by a few funds to create new strategies. Social media to date has been condemned as a fad in the hedge fund space, and most funds have dealt with the social media movement by shutting down access to these services and prohibiting any disclosure of fund names or activities on Facebook, Twitter and LinkedIn. In 2012, we will see many funds accept that the data generated and shared via Social Media will impact valuations, and most of these funds will adopt work-flows to incorporate Social Media messaging into their investment decision processes. The benefits of Social Media to investment managers is that it can now provide data points on market sentiment in a manner not previously available. This year Social Media will become more entrenched within the hedge fund community. With the lack of rules and regulations that govern the use of Social Media, hedge funds will only be more encouraged to use it to gain an advantage in their decision making process.
To summarize, technology innovation in 2012 will provide hedge fund managers with new products and services to improve their operations. However, the business of running a hedge fund will continue to get more challenging as managers will have to adhere to new regulations which, unfortunately, will only get more onerous in the coming years.
To hear more about trends and issues that effect the hedge fund community attend FTF’s 5th Annual Hedge Fund Operations and Technology conference in New York City on April 18th.