The alternative investment arena has experienced some tumultuous times recently, but continues to attract investors seeking asset class diversification and market outperformance. So what does the near future hold for fund firms? At this year’s SS&C Deliver, our annual client conference that attracted a record-breaking 1,300+ people from across the industry, we invited, John Budzyna, Managing Director of the alternatives practice at KPMG, to lead a discussion on trends in Alternatives with Michael Fastert of TIG Advisors and Daniel Nikci of Applied Fund Solutions to try and provide a glimpse into that crystal ball.
To set the stage, John pointed out a few present-day realities that most would agree on: margins are down, performance is under pressure, and the demographics of investors are changing. Dealing with multiple regulatory regimes around the world is driving up costs for many managers. Technology is becoming an increasing differentiator, a trend which may favor emerging firms over established players, whose legacy technology might make it difficult to adapt to change. These challenges are heightened with increased competition for front office talent, particularly quant skills.
The picture the panel painted largely reflected what was on the minds of the attendees. In real-time polling, performance and fee pressures were cited as the strongest headwinds facing alternative managers, with operational transformation also high among concerns.
On this last point, John expressed the belief that firms should “outsource everything, then take back what you need.” The industry needs to scale, and outsourcing is one way to achieve that. Moreover, investors will expect emerging managers to have institutional-caliber systems, which strengthens the case for outsourcing rather than trying to build a platform from scratch. With a proliferation of service providers, the outsourcing market is becoming more price competitive, which should work to the manager’s advantage.
In the quest for alpha, more firms are turning to alternative data, which requires a whole new set of skills and expertise. Funds are finding themselves in competition with tech firms for data scientists who can interpret alternative data. Firms will also need to incorporate artificial intelligence into their technology plans, whether internally or through an external provider.
Interestingly, in another polling question, the audience cited technology as an opportunity. With investors looking for broader diversification, hedge funds need to be agile and have the flexibility to invest in different asset classes with technology influencing the investment strategy. Firms are looking to leverage artificial intelligence and robotic process automation (RPA) in their back- and middle-office operations, which again leads to the case for outsourcing: a technology or service provider can take on the responsibility of upgrading and maintaining systems and spread out the cost. With outsourcing, however, firms will still need the in-house, senior-level operational expertise to monitor and manage service provider relationships.
Finally, capital raising will likely continue to get more competitive. Firms will be challenged to differentiate themselves, while answering increasing investor demand for transparency and lower fees. Managers must be able to convince investors they have a long-term vision. Time spent on due diligence inquiries is bound to get longer, not shorter. The current environment puts a premium on investor relations and communications, and firms that want to stand out will need to be sure they are devoting adequate resources to those areas.
Empowering managers with the tools and technologies to drive their practice into the next decade is important as they continue to adapt to the rapidly changing landscape while developing investment strategies that lead to alpha generation and client satisfaction.