Hedge Funds Transforming Costs for High Performance – Accenture Full Text

Post on: 22 Май, 2015 No Comment

Page 1

Summary

Accenture believes that the future of active fund management is bright, but a bright future is not going to preclude some pretty tumultuous times for a number of those in the industry.

Investors are becoming ever more discerning and delivering value is going to entail more than just the right investment strategies.

Excellence in execution, flexibility to respond to a changing environment and efficient operations are crucial for everything from effective risk assessment to competitive fees, whatever the state of the wider financial markets. The difficulty is what are seen as challenges today are going to become the expected in years to come, a situation which is going to favor the prepared.

Background

It goes without saying the hedge fund industry has suffered from some short term distractions. In the longer term, however, there are sound reasons for optimism looking at fund management generally and actively managed funds, such as hedge funds, in particular.

This is driven by the increasing realization that:

The population of the developed world is aging and most people have made inadequate retirement provisions. There is thus a necessity to look for enhanced returns.

In many in developed economies, these are the peak earnings years of their baby boomers and the life cycle savings model points to greater savings being made in the next few years.

Higher savings and/or returns are needed to compensate for higher taxes imposed on savings by cash-strapped governments.

The number of global high net worth individuals has grown by 8% per annum over the last decade, while the wealth of this group has grown by 9% per annum. These high net worth individuals have often been pioneers in driving financial markets forward.

In each of these cases Hedge funds are well-positioned to pick up more than their fair share of these investment flows.

Analysis

There is a wide array of challenges facing hedge funds as they decide their strategies, operations and seek to establish new business models.

On a competitive level, investors’ remain focused on performance, but performance itself is in pat dependent upon cost and transparency. The result will be that agile, low-cost funds will emerge to challenge underperforming active managers, be they hedge funds or actively managed asset managers. Meeting this competitive challenge will demand new approaches.

Hedge and other active funds will see three distinct trends facing the industry:

Funds will have to clearly articulate risks undertaken to achieve expected returns; performance related fees will depend upon consistent delivery of these returns;

The commoditization of significant parts of the industry is likely to leave large players with dominant positions in strategies such as equity arbitrage, while there will remain significant opportunities for smaller and more niche players in areas such as illiquid investments;

Differing strategies will require different operating requirements, with technology becoming a key differentiator for strategies where risk is short term or market related.

Recommendations

No matter what the future direction in the hedge fund industry, there is a clear and absolute need to focus on efficient operations and controlling costs. The benefits are not to be achieved through simply slashing headcount or technology budgets without heeding the effect on capabilities, this is a highly competitive industry and a good deal of thought is going to be necessary.

What is required is smart, nimble cost reduction that boosts agility and transparency, while simultaneously positioning the business for renewed strong growth as the commercial environment continues to recover.

Fund managers have three ways to improve profits: increase management fees; lower costs; enhance performance fees. The first is under pressure, while the last is subject to increasing scrutiny and claw-backs. Only lowering of costs remains completely within management control.

Those that doubt streamlining of operational efficiency is possible on a scale necessary to make any meaningful difference need to consider the wide variations in efficiency and productivity ratios within the asset management industry. There is no doubt that top performers are going to realize the potential for significant operational efficiency gains.