Our industry is at an inflection point.
Having worked on the investor services side of the hedge fund industry for almost 20 years – including for a $20+ billion London hedge fund and in my current position leading Investor Services Product for BNP Paribas hedge fund services globally – I’ve seen the sector evolve considerably since the turn of the century. Unsurprisingly, spurred on by rapid digital innovation, the pace of this evolution is quickening. Hedge funds now face an increasingly challenging environment for raising assets, with evolving market dynamics and increasing regulatory requirements giving the COO much to ponder.
However, we are also seeing a marked shift in the expectations of the modern investor. As fund managers’ end clients become increasingly demanding around fees, liquidity and transparency, the ability to meet their evolving needs is vital to attracting and maintaining capital. As a result, there has been a divergence from traditional ‘off the shelf’ strategies towards more bespoke structures prompting fund managers to not only reevaluate their offering, but also their core infrastructure and ability to facilitate such customized portfolios.
The rise of alternative…alternatives.
One of the ways hedge funds have responded to the growing demand for tailored products is through separately managed account, family office, co-investment and more liquid alternatives structures. Managed accounts and co-investments in particular are proving to be very effective at attracting new inflows with investors favouring the greater level of control, transparency and fee/liquidity flexibility they offer.
Similarly, the market for liquid Alternatives such as UCITS, ICAVs, and 40 Act funds has also been gaining momentum, as they provide an option for investors who often have limitations to investing in illiquid alternative assets or who prefer the cost, risk or oversight benefits offered by the wrappers. Moreover, this heightened accessibility is presenting new opportunities to tap an increasingly savvy retail investor space. As global social and demographic dynamics shift, giving rise to a burgeoning pocket of wealthy investors in emerging economies – particularly in Asia, a region whose appetite for alternative assets is on the up – the tailor-made trend is showing little signs of abating in the near future, and hedge funds are predicted to continue to diversify their products in a bid to raise and retain assets.
But there’s a catch….
While such flexibility positions a manager favorably in the eyes of the allocator, there is no doubt that offering a diversified product range brings with it added operational burdens and costs that will hit the COO’s desk. Existing processes, IT infrastructure and/or and legacy systems often require investment to support the new products while at the same time meeting investor servicing expectations. These infrastructure and distribution challenges are increasing the dialogue with service providers and positioning those with a global front-to-back, traditional UCITS as well as alternative service expertise to the fore, allowing COOs to address their full range of challenges under a single relationship. Compounding the issue is the greater scrutiny being placed on a fund manager’s fee structure, which also adds a layer of operational complexity. Following the publication of the Albourne Partners white paper in Dec 2016, which focused on a case study around the “1-or-30” fee structure, we are seeing this methodology gaining the attention of both managers and investors.
If you are considering diversifying your product offering or adapting your fee structure, working alongside your fund administrator to map out the best course of action is a worthwhile exercise. By leveraging their specific expertise and scalable infrastructure, you can take an end-to-end view of your operations to optimise processes and minimise fixed costs. To the extent that they are equipped to service the full spectrum of asset classes, they will also be able to assist in creating the end-to-end product lifecycle and manage the entire corporate action process to ensure a smooth transition for both you and your investors.
Putting the ‘service’ in investor services
Lastly, it’s also important to consider the bespoke investor requirements when it comes to service delivery. One size does not fit all. Today’s fund manager must be attuned to the differing preferences of its institutional and HNWI investors and indeed its distributors. Today’s HNWI allocator is increasingly sophisticated and expects a very different relationship with the manager and their service provider. They want online access to their data and reporting made available through familiar digital channels like mobile apps. On the other hand, the growing proportion of institutional Investors and distributors are seeking big data integration via APIs and file sharing from the manager and service providers, which can feed into their underlying technology solutions. Automation and STP are at the forefront of their operating model, and fund managers with the flexibility and innovation to respond to this will be well poised to reap the rewards.
As this dynamic continues to evolve – and looking ahead to the impending shift in the demographic profile of the end investor – a streamlined user experience and data accessibility will be a source of competitive advantage for fund managers who are committed to the digital transformation of their infrastructure. Doing so not only yields efficiency gains, but also helps cultivate a reputation for putting clients first.
In addition to improved efficiency and scalability, adaptability is increasingly core to a service provider’s proposition to a fund manager. Faced with ongoing change at a market and investor level, the ability to adapt the product offering and underlying infrastructure is becoming crucial for today’s COO. To ensure successful fundraising in the years ahead, a fund manager will need to be able to keep up with its allocators’ demands, while still dedicating adequate resources to alpha-seeking activities.
If you have any questions or would like to better understand how BNP Paribas helps clients navigate the changing investor landscape, please contact us.