The hedge fund industry’s next chapter will be driven by the insights ascertained by hedge funds during the pandemic around the capabilities of its people and its technologies, its important relationship with investors, as well as its unique culture, according to new findings from AIMA and KPMG. These lessons allowed the industry to strategically adapt, pivot and thus position itself for the investment opportunities ahead. While the changes driving these strategy shifts all have implications on the business operating model, the industry is well positioned to address those challenges.

In the autumn of 2021, KPMG International and AIMA (Alternative Investment Management Association) conducted our annual survey of hedge fund managers globally, with 162 respondents representing an estimated US$1 trillion in assets under management (AUM). In addition, KPMG International and AIMA canvassed the views of the industry via one-to-one interviews with Hedge Funds, investors and key ecosystem players including technology companies, prime brokers, fund administrators and law firms to provide additional insights to the survey findings.

The research reveals that the trends identified in our 2020 report, Agile and Resilient, have begun to take on additional dimension and importance helping to accelerate the industry out of the pandemic.

                

Accelerators

KPMG!
49 %

Complimented their traditional public market investments with private markets or other new products or strategies

KPMG!
32 %

Expanded their investor teams and increased its organizational importance as it pertains to capital raising and investor relations

KPMG!
32 %

Prioritized alternative data and infrastructure as top firm investments in front-office technology

KPMG!
41 %

Prioritized data management as top firm investment in back and middle functions

Six key themes explored

  • 79% of respondents are moving to some form of permanent hybrid working, although many have reservations about their new models
  • 61 percent said offering flexibility to work in a hybrid model is a primary incentive for retaining and securing top talent, with 67 percent saying cultivating inhouse talent.

  • 32 percent said alternative data and infrastructure and 31 percent said expanding research tools are their top priorities for front-office technology.
  • While 41% said data management and 29% said cybersecurity, including third parties are their top priorities for middle and back office.
  • 36 percent said their investments will be equally balanced between front, middle and back office technology.

  • 72 percent of respondents said that previous relationships with investors are vital for retaining and growing the firm’s capital.
  • Yet, 56 percent of respondents expect most of the work of investor relations will continue to take place in a virtual environment in the short-to-medium term.

  • Top two strategies believed to grow the most in popularity over the next 12 months, hybrid hedge/private equity products (46%) and digital assets (36%).
  • 49% of hedge funds have complemented their traditional investment strategies with private markets or other new products or strategies
  • Hedge funds are taking an incremental approach to ESG given the disharmony over ESG investing rules in different jurisdictions, as well as a lack of consistent data and the expertise to interpret it.

  • 42 percent of respondents cited regulation as being their firms’ chief concern for the next 12 months.
  • Conflicting multi-jurisdictional rules took the top spot (28%), followed closely by ESG-related disclosure rules (26%).
  • Changes and/or new requirements by AIFMD, SEC, MiFID, ESG-reporting are resulting in greater uncertainties.
  • Tax remains a key concern, with capital gains rates being the greatest tax concern firms will face over the next 12 months.

  • Nearly 75 percent of respondents indicated that the events of the past year gave them reason to take a fresh look at their operating model and what functions might be better served going forward in a remote environment.
  • The operational functions most likely to be outsourced by firms of all sizes were the technology platform and regulatory compliance.
  • 63 percent believe their firm’s infrastructure is a differentiator and will continue to build proprietary processes.

The findings from this year’s research describe an industry accelerating out of the pandemic, with firms adopting new approaches to improve the efficiency of their business model and developing new solutions to deepen their alignment with investor clients’.

In the face of fresh threats from new variants, fund managers are planning for both ongoing disruption and opportunities, with most interviewees confident about the industry’s long-term prospects.

Key takeaways:

1. The hedge fund industry embraced the hybrid working environment, accentuating the key values of both environments:

  • Maintaining culture, optimizing collaboration, and creatively attracting and retaining its talented professionals are of critical importance.
  • Talent management remains the number-one business priority driven by a greater incorporation of technology and reliance on automation, and reinforced by fund managers acknowledging cultural shifts towards improving employees’ work-life balance and the imperatives of being more diverse, equitable and inclusive.

2. It evolved its product set to respond to the customization demands of its investors.

  • Multi strategy firms may be best positioned from an operational perspective.
  • Market opportunities continue to prevail out of the pandemic, private credit, and hybrid hedge/private equity strategies lead product innovation.
  • Institutional investors are poised to balance their investment holdings with alternative investments, as a growing component of their portfolios; but they continue to demand specialized structures.
  • ESG features will add to the complexity of products in the near to medium term.

3. The industry enhanced its transparency and communication with investors. Digital data sharing facilities and virtual due diligence advances have enhanced the allocation process.

  • The industry has begun to moderate its business operating models to allow for the changing inflexion to the new strategic imperatives, while narrowing margins force decisions on other non-core portions of the business.
  • The ecosystem will continue to become a strategic operational partner as the Hedge Fund industry looks to scale its investment opportunities.
  • Emerging managers continue to be an important segment of the industry growth, the bifurcation with the more established managers continues to grow.
  • Digital strategies and the growing role of data analytics are at the forefront in the automation of processes across firms.