Post-COVID automation is the key to differentiation for hedge funds

Globally, economies are cautiously reopening. Businesses are keeping one eye firmly on the present but also cautiously looking ahead to what’s shaping up as a great reset.

In the alternative asset management industry, we are poised to undergo several changes over the coming months and years, some of which will be truly transformational. If hedge funds are to navigate this uncertain period, they will need to embrace automation. Even though a few investment firms have implemented positive structural and operational reforms to their front, middle and back offices, a large proportion of the industry still relies on legacy technology and manual processing. This ongoing dependency on antiquated systems exposes fund managers to potential risks and creates added costs.

Constrained by legacy

In many instances, fund managers continue to perform operational activities — such as investor reporting, risk management and compliance — using Excel spreadsheets, often stored in an unstructured format across multiple workstreams. Not only does this increase operational risk and duplication, as the likelihood of making a mistake or miscalculation is high, but it eats into margins because the costs of running legacy technology can be quite sizeable, owing to the increased reliance on human intermediation in the workflow process.

Aside from being incredibly inefficient, institutional investors have made it clear that they expect their fund managers to have a robust digital strategy and automated operational processes in place. This is because clients are fully aware of the risks and pitfalls of running ageing technology systems. A failure to automate could therefore be the difference between losing and winning a mandate. With competition for investor capital likely to accelerate, fund managers need to demonstrate that they have best in class technology.

Expect scrutiny from investors and regulators

COVID-19 has also demonstrated how integral automation is, especially following the transition into lockdown working conditions. It was largely the fund managers who failed to invest in their core technology infrastructure and automated processes who have struggled the most operationally during COVID-19. That the initial implementation of some business continuity plans (BCPs) was so haphazard at certain funds it is likely to result in these firms fielding tough questions from investors. As a result, automation and operational resiliency will become primary areas of focus in investor due dilligences moving forward.

It is not solely clients who will be reviewing the veracity of the alternative asset management industry’s operational processes. Regulators — including the US Securities and Exchange Commission (SEC) and UK Financial Conduct Authority (FCA) — issued strongly worded statements at the beginning of the year telling investment firms to focus on their operational resiliency. The FCA said operational resiliency, namely the ability to adequately manage technology and cyber-risk, was one of its main priorities alongside liquidity risk; governance; and LIBOR reform. Consequentially, regulators will almost certainly examine how the technology and operational processes at asset managers performed during the peak of the COVID-19 crisis.

Why automation matters

Automation can net managers many operational benefits. It can facilitate enhanced STP (straight through processing) and reduced manual intervention, thereby allowing for cost synergies to be realized. At a time when margins and revenues are under enormous pressure, these operational savings will be crucial. New data from Credit Suisse found that hedge funds have emerged as the top pick among asset allocators heading into the second half of 2020, outflanking other products such as private equity and real estate as investors’ asset-class-of-choice. If managers want to be on the winning end of this opportunity they will need to do all they can.

Christopher Bloechle

Christopher Bloechle is chief technology officer at Portfolio BI and oversees the building and deploying of the solutions of the company’s flagship product PBI EDM, a SaaS-based front-to-back office automation technology platform. Prior to joining Portfolio BI in early 2018, he spent 16 years with Point 72 Asset Management/SAC Capital Advisors successfully fulfilling IT roles with responsibility for software products and solutions utilized in every facet of the fund.

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