January 9, 2021 | Best Practices
Building Investor Confidence
Hedge fund investors are back in droves, as fund managers proved their worth in 2020’s difficult markets. In the third quarter of 2020 alone, hedge fund strategies received net inflows of around $13 billion.
As investors have recognized the value of hedge funds’ ability to protect against market downturns and add value through active strategies, this surge in investor confidence creates opportunities for nimble fund managers to add to fund lineups and AUM.
Even as cash flows turn positive, investors will continue to push for lower fees. In a bull market where more investors are returning to hedge and alternative funds, managers are pressed to become more efficient. They are looking for ways to reconcile lower expenses and operating costs, all while avoiding hits to the bottom line.
Emerging managers must be cautious about cutting corners in areas that will affect investor confidence, namely in fund operations and technology. Research suggests creating a strong operational infrastructure can reduce funds’ exposure to performance-driven outflows.
For instance, one academic study found that hedge funds located in countries with weak investor protection laws saw greater outflows when performance lagged. The same relationship may very well apply at the fund level. As a result, building investor trust can be critical to your funds’ long-term stability.
The Benefits of Moving to the Cloud to Exceed Investor Expectations
As hedge fund managers look to meet investor expectations—and cut costs—the cloud provides a solution.
Currently, the hedge fund industry is fairly evenly split between those investment management systems that are wholly cloud-based, entirely based on-premises, or some hybrid of the two. However, when you add together the cloud and hybrid (partially cloud-based) managers, you find that 70% of hedge funds are hosting at least some of their systems in the cloud.
In a recent survey, we asked hedge fund managers about their experiences with the cloud. Here were some of the results:
- Cost-efficiency: Hedge fund managers that are fully or partially using the cloud unanimously reported improvements in operational efficiency, with 96% stating they have maintained the same level of operational staffing post-migration, and none have reduced headcount.
- Cybersecurity: Full and partial cloud-based managers (72% and 50%, respectively) also said migration to the cloud improved data security, and two-thirds of the fully cloud-based firms report improvements in cybersecurity as well as better protection of their intellectual property.
- Consistent, transparent data: Cloud-based management provides tools for integrating data from multiple sources into a single golden dataset that is available to everyone on your team. Our survey found that hedge fund managers using third-party, outsourced solutions are most satisfied overall with their data management capabilities.
The Cloud and Outsourcing: Two Routes to Greater Cost-efficiency
Moving to the cloud can also make it more seamless for fund managers to outsource non-essential functions. This can be a critical step for small- and mid-sized fund managers who may not have the resources to build all aspects of their operational infrastructure in-house.
Currently, 70% of hedge fund managers outsource at least some of their operations, with the trend most prevalent among smaller managers (<$250 million in AUM) at 86%, according to HFM Insights, Q2 2019. Among managers who use the cloud on either a full or partial basis, our survey found that nearly half (44%) said they are more likely to use outsourcing.
Cloud hosting and outsourcing are linked because fund managers who use the cloud are already delegating cloud management to an outside provider. Fund managers often find that this relationship saves time and money because they don’t have to train or retrain IT staff.
The relationship also brings in additional expertise, as the vendor focuses solely on how to manage the cloud. Through working with a cloud provider, fund managers often begin to see the benefits of tapping into other service areas that their technology partner offers, such as middle- and back-office functions, for example. Outsourcing talent is a natural evolution from outsourcing technology.
Funds Face Changing Customer Expectations and Regulatory Hurdles
The past 11 years have been generous to consumer, retail investors who’ve flocked to low-cost, passive investment products, like index funds and ETFs. Hedge funds, on the other hand, have struggled to attract new investors, who are notoriously skeptical about the performance of actively-managed funds.
This new generation of investors is used to total transparency and daily reported fund info, which is less common in the hedge fund world.
Fund managers are also facing ever-changing regulatory and compliance issues. Those that haven’t invested in nor updated their technology infrastructure will close themselves off to larger, institutional investors. But this can be largely avoided.
The Best Investors Are Confident Investors
Today’s investors take an active interest in their investments relating to everything from security, data access, and the underlying technology powering their funds. Your system needs to serve as more than a “due diligence checkbox” for them. Are you ready for that?
As your all-in-one solution, Enfusion gives you:
Streamlined Operational Efficiency
- One internal data set across the front, middle, and back office means everyone is on the same page with the latest data.
- Your designated support team ensures a speedy resolution to any problems, questions, or concerns.
- Work with one vendor for the entire front-to-back office workflow.
- Keep operations lean by eliminating manual processes.
- Avoid time-consuming maintenance of locally-installed systems.
- With a weekly release cycle, the Enfusion platform is continuously improving with new technology based on client feedback.
- Enfusion’s robust compliance engine ensures businesswide pre-trade and post-trade monitoring in real-time, with hundreds of pre-populated and customizable rules covering all instruments, regions, restricted issuers, UCITS, and 40 Act funds.
- Leverage our ever-expanding library of proven regulatory rules and standardized rule templates. Create, update, delete, and manage your own compliance rules.
- Monitor and prevent regulatory issues with real-time, customizable notifications.
What Enfusion Can Do for Your Fund Launch
Assure your investors that you are set up for long-term stability and growth with a front-to-back platform that demonstrates institutional-grade operations, especially crucial during the capital-raising phase.
Read our recent survey findings to learn what 56 hedge fund managers across multiple geographies, AUM tiers, and strategies are doing right in terms of managing their data sets, systems, and hosting decisions.
Let’s talk about how Enfusion can help your fund.
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