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How can hedge funds thrive in a challenging environment? – Linedata Exchange Europe

Regulatory and fee pressures are forcing the hedge fund industry to evolve, but a lively panel debate at the annual Linedata Exchange Europe client conference in London affirmed that with the right investment approach, infrastructure and distribution strategy, hedge funds will continue to succeed. 

Paul McLernon, COO, Pensato Capital said that while regulation is driving up costs and complexities in product development and capital raising, it can also bring about positive change. “We should embrace change as an opportunity,” he said.

MiFID II compliance is a major undertaking for hedge funds and service providers alike. Geoff Galbraith, COO, Man Group explained that the next six months is a crunch period for MiFID II, “it impacts every aspect of an operating model.” 

Paul Spendiff, managing director, Apex Fund Services, highlighted that with the industry still awaiting the final MiFID II requirements, preparation is not as advanced as usually expected at this stage, saying that “the usual pioneers for change are not as far along as they have been in the past, for example as seen with AIFMD.”

The panel also discussed profitability of hedge funds in an increasingly competitive environment. “The 2 and 20 fee model has been challenged for a long time,” said Galbraith, “people are willing to pay for performance but fees must be tailored to the investment strategy and vehicle”.

McLernon stated that the industry must “be flexible to the needs of investors” and Spendiff added that the assets under management required to break even has definitely increased, potentially now standing at $100-200 million.

The drive to ensure future profitability is prompting managers to rethink their operating models. “Hedge funds need to be open to new ideas to generate revenue and diversify,” said McLernon. He also expects to see consolidation and a move to platforms, explaining that regulatory pressure will push smaller players onto the platforms of bigger players.

The panel identified opportunities to work with external providers to improve efficiency. “The hedge fund industry doesn’t have a monopoly on intellectual capital”, commented Galbraith. He said that funds will look to technological developments like blockchain to take out costs but this will take time.

“Embracing new technology can help lower barriers to entry for new funds” he added. Galbraith also cited big data and machine learning as areas of opportunity. 

Ed Gouldstone, Global Head of Product for Asset Management at Linedata, commented: “We’re at a pivotal time for players across the asset management industry, particularly in hedge funds. There’s a continued drive to deliver value for clients and to increase transparency, and the challenge is for hedge funds to maintain and grow their profitability without sacrificing operational or investment performance. Our panel debate confirmed that the shape of the hedge fund sector is evolving, but the opportunities are there for the managers who are prepared to adapt.”

Linedata is a global solutions provider dedicated to the investment management and credit community, with close to 1250 employees in 20 offices across the globe. Linedata has been at the service of the financial industry from day one, and applies its market and client insight to provide innovative and flexible mission-critical software and services that help its clients grow in over 50 countries. As a pioneer for over 15 years with the set-up of SaaS infrastructure for the financial industry, Linedata remains committed to this model throughout the global financial community and for its full range of products. Headquartered in France, Linedata achieved revenues of EUR 166.8 million in 2016. This company is listed on Euronext Paris compartment B FR0004156297-LIN – Reuters LDSV.LN – Bloomberg LIN:FP.