Effective data management – a growing challenge for hedge fund managers
Providers of outsourced services not only can help hedge fund managers meet the new requirements of regulators and investors for more detailed and timely investment data, they can help managers better use the data they have to streamline their operations or refine their product offerings, says Pat Hayes, a senior managing director with State Street Alternative Investment Solutions in Ireland…
Changes sweeping across the investment industry pose profound implications for hedge fund managers and how they manage data. As investors develop new approaches to asset allocation and risk management, their demand for enhanced information is accelerating. Compounding this challenge for hedge funds are the many regulatory directives now emerging that include additional reporting and record-keeping requirements.
As a result of these changes, asset managers generally foresee increased pressure on costs and operating models. The mounting need to achieve efficiencies in their overall operations is driving many hedge funds to consider innovative options, including strategic partnerships with service providers that can deliver scalable, outcome-driven solutions.
Today's growing focus on data management stems largely from the investor- and regulator-driven pursuit of greater transparency and risk awareness. In response to a difficult investment climate, Europe's pension funds, insurers and sovereign wealth funds are revising allocation strategies to accommodate a broader range of asset classes, including alternatives.
They are also adopting more robust methods for managing risk in a volatile low-return environment. To support these efforts to balance risk and reward, investors seek high-quality data to guide them.
Amplifying this trend, incoming directives contain significant new reporting and record-keeping requirements. For example, the revised Markets in Financial Instruments Directive (MiFID II) will have far-reaching implications that include changes in client categorisation and best execution rules from 2014. In response, asset managers may be obliged to develop and target products more narrowly at specific types of investors.
The gravity of the upcoming data management challenge emerged strongly in the latest State Street survey of European asset managers conducted by the Economist Intelligence Unit. With responses from more than 160 asset managers in 25 European countries, the survey was an opportunity to assess the state of the industry at a critical point in its evolution.
Asked to identify the biggest data management challenges facing them today, 49 percent of asset managers highlighted the provision of a high level of detailed and quality data to clients. In addition, they recognise that these demands will put significant pressure on their existing infrastructure, with 44 percent saying they would struggle to achieve sufficient scale with their in-house systems to deliver on the data management challenges ahead. Among other responses, 33 per cent cited accurate and timely data to regulators and auditors, while 32 per cent identified the safeguarding of investor data.
In the face of mounting complexity and growing reporting burdens, the benefits of leveraging the scale and expertise of third-party providers through outsourcing partnerships look increasingly attractive. After several years of difficult market conditions, during which asset managers have undertaken many of the easier cost-saving measures, they must now address more radical solutions.
For example, they are looking to the advantages of single-platform infrastructure and centralised data management systems, often replacing multiple systems inherited through acquisition. While it has been possible to avoid the challenges of such projects during boom times, the current cost-conscious and risk-averse climate gives such undertakings a new urgency.
Streamlined platforms provide a consolidated picture of global exposure for reporting to investors and regulators, possibly at a lower cost. Furthermore, these platforms offer the flexibility and agility needed to launch new products quickly as asset managers seek to grow through innovation. Costs to develop, maintain and upgrade new infrastructure, however, can be daunting.
The operational challenges of data management are just one driver of the increasing trend toward outsourcing. Managers’ preparedness to outsource extends right through the investment value chain, comprising not simply the back and middle office but increasingly front-office activities, too, where there may be scope to outsource virtually everything beyond core investment decisions.
Increased reporting and compliance burdens that add to the complexity of data management certainly represent important factors in the decision to partner with external providers. Outsourcing enables asset managers to delegate these and other key administrative responsibilities that threaten to distract them from their core investment focus.
At the same time, managers may need to invest substantially in expertise and technology to keep pace with evolving compliance requirements over the longer term. While the largest asset managers may have the scale to absorb this investment, other firms view outsourcing as a compelling opportunity to benefit from the resources and efficiencies of scale of a third-party provider. With this in mind, leading providers are continually seeking to add new capabilities to meet the increasingly complex needs of asset managers and asset owners.
Amid a growing focus on risk, effective data management has become a necessity for asset managers, investors and regulators. With 42 percent of respondents to the State Street survey rating their ability to capture and report regulatory data as only adequate, it also poses significant challenges.
In addition to the regulatory requirements, investors expect to obtain a consolidated picture of their assets, a task made vastly more difficult by today's more complex global and derivatives-heavy investment portfolios. Only robust data management capabilities can produce the answers that investors, with the memory of the financial crisis still fresh in their minds, are demanding.
As a result, data management now plays a central role in the integrated solutions for assessing risk and performance that can help managers to maximise returns in a more risk-controlled environment. Far more than a record-keeping function, it has become an essential element on the frontier for investment analytics, addressing the defining dilemma for asset managers in today's climate: the need to achieve enhanced returns in a world more risk-averse than ever.
As hedge fund managers consider outsourcing among their data management options, they also recognise that asset servicing organisations – with their geographic breadth and local expertise – represent valuable sources of insight into ways to streamline their operations or refine their product offerings. Whether supporting key reporting activities, helping to manage risk, or enabling managers to seek new markets and investors, service providers can become strategic partners for leveraging the value of data.
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