Large Increase in Number of Hedge Fund Shareholders Fuels IRM Market

Carbon360 Research Note

New York/January 11, 2006/: Stakeholder numbers, both individual and institutional, in alternative asset vehicles are expected to grow a phenomenal 210% in the next five years, spurring a corresponding demand for new software and technology to manage investor relationships.

The asset management industry is experiencing tremendous growth in assets under management, as well as the numbers of shareholders that need serving. Carbon360 Research estimates that the total number of alternative and separate managed account shareholders will grow from 13.3 million shareholders in 2005 to 41.2 million in 2010.

"Investment managers are facing increasing external pressures, such as more stringent regulatory requirements, and suitability and accreditation tests," said Brian Shapiro, President of Carbon360, a research firm focused on the investment management services business. "With SEC registration, managers are required to create, retain and submit information related to their business practices, clients and adherence to regulatory requirements," he said.

To meet this need to improve client servicing, a nascent technology vertical known as Investor Relationship Management (IRM) software is growing to meet the new demand. However, while Carbon360 estimates that there are over 30,000 investment management firms that could benefit from an IRM solution, of that group, less than 5% have currently purchased one.

Underscoring the need for new technology are the client servicing costs for individual managers. Carbon360 estimates that the average hedge fund manager must contend with 460 shareholders between an estimated three funds (LP, Onshore and Offshore feeders). Assuming each client service inquiry costs $50 per hour and each client makes 12 inquiries annually that equals $276,000 client service dollars annually to respond to client requests.

"Carbon360 believes as much as 60% in cost reduction can be made on statement production time and ad-hoc Excel-based report creation with the deployment of an IRM application," said Mr. Shapiro. As the regulatory environment becomes increasingly complex, asset managers of all sizes must document every aspect of their investment management operations. IRM software helps with this by collecting, centralizing, and storing all necessary data points.

"The pace of change in the asset management industry and recent hedge fund failures, and the risk of new ones, are behind investor operational risk and fraud concerns," said Shapiro. "The application of an IRM system to help govern fund and separately managed account tracking and due diligence functions could be of tremendous value," he added.

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