Data is the Key to Success for Hedge Funds

Market participants are feeling the pressure to diversify their portfolios and diversify quickly. Market volatility, shifting investor expectations, ongoing geo-political risks and growing regulatory scrutiny have all conspired to make life difficult for simple equity-based or single asset class investment vehicles.

Data from Hedge Fund Research shows that from 2015 to 2023, the proportion of hedge funds based solely on equities dropped from 60% to 45% and a 2022 survey from Barclay Hedge found that the number of multi-strategy funds increased from 20% in 2010 to over 35% in 2022.

The face of market participants is changing, and more and more managers are looking to third parties for answers. More accurately, they already know what the answer is-they're just not clear on how to articulate it.

This very issue was the focus for a panel discussion-Servicing Multi-Asset Funds-held at the recent InvestOps conference in London. SS&C's Global Head for Middle Office Outsourcing, Marcela Crossman, was invited to join practitioner Ryan Atkinson, Head of Operations at Intermediate Capital Group, and solutions provider Matthew Goldblatt, Head of Investment Operations Solutions at J.P. Morgan, to discuss and plot out a way forward for the sector.

The panel was asked if and why this trend for greater diversity in portfolios required managers to overhaul their operations.

One panelist suggested that current systems and processes were designed for a dated and limited model-equities and single asset classes-and as such, are increasingly unfit for purpose.

"Managers could attempt to make the transition to multi-class and more complex assets with their existing setup, but it would be a very manual, slow and expensive process. It can't really work and that is why more managers are turning to technology for help," said Marcela.

Traditionally, this has meant ripping out and replacing existing systems-an expensive and significantly distracting process, and one that most managers would hope to avoid. But as one panelist pointed out, it doesn't have to be a big leap forward-the modernization gap can be bridged by taking a series of small but deliberate steps forward, focusing on key areas of concern, one by one.

From there, the conversation moved on to integration-integration of data, asset classes and processes. Marcela pointed out that before any integration could be considered, managers must focus on the data-something that she believed most had now woken up to.

"The only way you are going to be able to automate a process or make the most out of AI is if you have solid data. Before firms can even think about approaching robotics and AI, they need to get their data right," she advised.

The panelists discussed how securing, cleaning, categorizing and managing data for a multi-class investor was a huge undertaking. It is this realization that has led more managers to seek out specialist partners.

While technology remains crucial, the panel agreed that the key to building a modern business is data, how it influences the technology and, crucially, how all of that is brought together into one platform.

"A centralized data management platform standardizes the data, which ensures managers can get consistency across all asset classes. And the best way to ensure compatibility across diverse data formats is to outsource the non-core operational components and engage an expert partner to manage all that and maintain data quality and accuracy," said Marcela.

The panel questioned whether the traditional approach of employing specific tech for individual purposes had its limitations, as it failed to address the fundamental integration problem. It was suggested that this approach may even compound the issue as multiple systems, hosted in multiple places, could struggle to maintain integration over time.

"We own all our technology at SS&C, and it is built to work together, so no matter how far a client chooses to head down the modernization route (or how little), whatever solution we implement, it will always operate as one coherent digital process," said Marcela.

And she had some parting advice for the audience when they consider their approach to outsourcing.

"Outsource the commoditized, non-core functions as that allows you to tap into specialized capabilities without diverting internal resources. You can retain control over your operations and the data that feeds them; but crucially, you can focus more on what matters to you-securing Alpha," she said.

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