Aite Group and SunGard Study of Hedge Funds Reveals Importance of Establishing Institutional Credibility

10 September 2013

New global research undertaken by analyst firm Aite Group and SunGard finds that hedge funds see institutional credibility as a key element for achieving success. The research which surveyed 40 senior executives and managers from Tier I and Tier II hedge funds in the U.S., Europe and Asia finds that 82% of firms reported that establishing institutional credibility is extremely or very important.

The concept of institutional credibility is the idea of the ability of an investment firm to instill confidence to the outside world surrounding its operational stability and reliability. Key findings conclude the following challenges stand in the way of institutional credibility:

Operational inefficiency: Nearly a third of firms surveyed report that operational cost pressures and lack of personnel resources are extremely or very problematic. Additionally, 41% of hedge fund participants find achieving operational efficiency “extremely” or “very” challenging. The survey found that nearly half of respondents cite lack of regulatory clarity as a "very" or "extremely" problematic hindrance to achieving operational efficiency.

Need for enhanced risk management: On the risk management side, survey respondents reported having the most difficulty in achieving their desired level of transparency and reporting capabilities. A major concern from participants is the need to integrate separate components of risk management to get a complete view of risk from multiple systems and integrate with non-risk systems.

Lack of clarity for investment decision making: 40% of investment decision makers surveyed find generating alpha “extremely” or “very” challenging in the present environment however most of these respondents believe achieving alpha is always difficult. Although the majority of investment decision-makers surveyed feel that the ultimate responsibility for performance lies with themselves, the second greatest barrier to success is the lack of operational and investment resources. When asked to consider factors aiding investment decision-making from a technology standpoint, over half of investors believe that staying up-to-date with technology or being aware of available technological capabilities in the marketplace may help their firm’s performance. Both investment decision-makers and participants solely involved with portfolio operations believe that achi eving technology objectives would bring about at least some improvement to investment performance.

Danielle Tierney, analyst, Aite Group commented: “For hedge funds, approaches to portfolio management are constantly evolving, not only in terms of investment practices but also the supporting technology. As transparency and accountability gain higher priority for firms, their technological infrastructure will play a more important role in their day-to-day activity and overall performance.”

Rob MacKay, COO of hedge funds and risk solutions for SunGard’s Asset Management business, said, “The concept of institutional credibility is vitally important and likely to become a standard business metric for clients to evaluate when selecting an investment manager. Clients and prospects now have a heightened interest in the stability and reliability of firm operations, and maintaining systems that will instill confidence in that regard is now essential. Tackling key challenges in the specific areas of operational efficiency, risk management and transparency for correct decision making will certainly help set firms on the correct path to achieving institutional credibility.”

[1] Tier I is defined as those hedge funds with AUM equal to or greater than US$10 billion and tier II hedge funds are those funds with AUM between US$1 billion and US$9.9 million.

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