Hedge funds in North America face a grueling ‘survival of the fittest’ environment, according to primary research from Aranca, supported by FIS. The data indicates hedge funds in the U.S. and Canadian markets need to alleviate regulatory and competitive pressure; the greatest challenges they face are growing AUM (51 percent), fee pressures (46 percent) and keeping pace with regulatory change (42 percent).
In this mature market, U.S. and Canadian hedge funds are seen by investors as a source of event-driven, fixed income and debt-based strategies, and strategies have a less international feel. A consequence of this maturity can be a greater level of operational complexity and more entrenched technology. Firms looking to differentiate themselves in a competitive market are looking to change their technology to prioritize operational efficiency (66 percent) and achieve cost reduction (49 percent) as an outcome.
At the same time firms expect a considerable impact on their business over the next two years from Dodd-Frank/Form PF (52 percent), and the AIMFD and the Foreign Account Tax Compliance Act (FATCA) which were each expected to have a significant impact by 50 percent of respondents.
The greatest compliance concern – 60 percent – went out to “other” regulations, possibly reflecting the mandatory registration demanded by market regulators such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), or the state regulatory authorities, which Aranca notes subject U.S.-based funds to increased scrutiny from regulators. The extensive reporting requirements added to the administrative and operational burdens.
Canadian fund managers are also taking a hit from performance and transparency regulations from the Ontario Securities Commission (OSC) and the Client Relationship Model Phase 2 (CRM2). These also boost fee and performance disclosure requirements.
The knock-on effect for hedge fund administrators is that 69 percent placed fee pressures in their top three risks/challenges faced by their businesses, higher than those in other markets, while managing operational costs (38 percent) and staying ahead of the competition (31 percent), the second and third highest concerns were far lower down the chain.
With no way to up or down – by increasing costs or fees – moving out to work with technology and business partners is one way to handle these challenges. Finding a partner able to provide solutions where they are needed – with an end to end technology platform – can deliver far greater control of costs. Using a service model for technology further makes for easier management of cost.
Operational efficiency can also be increased by streamlining vendor relationships. Identifying technology partners who can also operate as business partners and can deliver a more effective flow of information can make a business stronger.
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