Regulation main driver for change
Risk management is set to play a crucial role in the functioning of European hedge funds, according to a survey conducted by Omgeo and Hedge Funds Review. Almost all of the hedge funds surveyed (94%) believe that demonstrating robust risk management capabilities will be of critical (52%) or moderate (42%) importance to the fund-wide efforts to raise assets in 2012.
Regulation is considered the main driver for operational change over the next 12-18 months (44%) and three quarters (75%) of hedge funds expect to alter internal procedures or invest in IT as an outcome of regulatory change.
The majority of funds are looking to improve post-trade processing in the context of the need to process higher volumes, coupled with the requirements for better risk management. Hedge funds believe the removal of manual processing (48%) followed by faster confirmation of trades (17%) and improving connections with counterparties (17%) have the highest potential for improvements in post-trade operations.
The regulations that rank as having the most impact on hedge funds, in order of impact, are the Alternative Investment Fund Managers Directive (AIFMD), Markets in Financial Instruments Directive (MiFID), Solvency II and the European Infrastructure Market Regulation (EMIR). Nearly half (48%) of respondents have concerns about the additional complexities of post-trade processing as a result of these regulations.
In relation to the move to central clearing for derivatives products, nearly half of funds (43%) have concerns about the cost to clear OTC derivatives transactions, with one third (33%) concerned about the margining and collateral requirements in a cleared and non-cleared derivatives landscape.
Matthew Nelson, Executive Director of Strategy, at Omgeo said: “This survey highlights a high level of awareness around risk and regulation within European hedge funds. Regulation is high on the agenda for many funds but, in many ways, operational improvements are being driven from within the fund as a way to attract assets, retain control of risk exposures and allow for growth.”
“Once a fund’s trading reaches a critical mass and becomes highly complex, spread across various asset classes, geographies and clearing environments, manual processes need to be replaced by automated solutions.”
The survey also showed that hedge funds anticipate a growth in volumes across a variety of asset classes. The majority of respondents expect FX volumes to experience the highest growth (27%), followed by equities (23%), contracts for difference (CFDs) (18%), fixed income (16%) and exchange traded derivatives (ETDs) (10%).
The majority of respondents to this survey are from single manager funds (65%), with funds of hedge funds making up almost 35% of respondents. The survey was completed by those responsible for technology in funds based in Europe, including chief financial, operational or technology officers.
The survey was completed by 52 European Hedge Funds and was conducted between February 20, 2012 and March 20, 2012.