Study Finds Hedge Fund Managers Making Operational Changes to Reduce Risk, Attract Investors
Boston/New York/London - 22 February 2010
In the wake of a financial crisis that impacted the ranks of global hedge funds, hedge fund managers are enacting a series of operational changes to reduce risk and enhance their ability to attract investors, a study has found. To manage the complexities associated with critical operational enhancements, many hedge fund managers are starting to automate key processes such as reconciliation, cash management, collateral management and pricing.
The study, commissioned by Omgeo and conducted by Greenwich Associates, the leading research-based consulting firm in institutional financial services, examined the operational practices of over 50 hedge funds each with assets over $1 Billion (USD) in North America, Europe and Asia.
Approximately 70 per cent of the hedge fund managers participating in the study say they have altered their operations to reduce counterparty risk. Among the steps taken by these managers feature: revising policies and controls, increasing cash accounts and adding prime brokers. Almost 60 per cent of managers have increased the number of prime brokers with whom they work — a move that virtually all the managers say is intended to reduce counterparty risk. Managers based in Asia were especially likely to have increased their number of prime broker relationships, with 78 per cent noting an increase. At the same time, nearly 40 per cent of the managers have taken steps to enhance reporting and increase transparency for investors, and about one-third have started to obtain more independent valuations and accounting.
More than two-thirds of the hedge funds participating in the survey believe operational improvements and automation have a direct and positive impact on their ability to attract investors and assets. “Better routines and work practices have helped us provide transparency to our clients, which gives investors additional confidence in us,” says one North American manager.
“The events of the past year have illustrated the direct link between operational improvements and hedge funds’ ability to attract and retain assets from investors,” explains Greenwich Associates consultant Andrew McCollum. “There’s a real change of behavior going on, the days in which investors would entrust their money to the black box of a skilled hedge fund manager are over. In the post-crisis marketplace, investors are demanding not only transparency, but also sophisticated operational processes and infrastructures capable of managing the types of risks they’ve experienced over the past 18 months.”
“This study highlights something we’ve been hearing for some time from our own hedge fund clients: today it is absolutely critical for hedge funds to understand their counterparty risk exposure, as this knowledge is imperative to a funds’ ability to attract capital,” said Matthew Nelson, director of market intelligence, Omgeo. “It is encouraging to see so many hedge fund managers in this day and age recognizing how closely operations and counterparty risk are aligned and that such measures are being taken to improve automation in the post-trade world.”
Omgeo and Greenwich Associates will host webinars on February 24th and 25th discussing these survey results with members of the global hedge fund community.