Five Must-Haves for Hedge Fund Automation

Matthew Pratt, Mark Thomas

After overcoming a year of volatility and mixed returns in 2020, and a period under the spotlight in early 2021, hedge funds are as focused as ever on delivering outperformance. Underpinning the last year was the continuing trend of using data and technology to achieve automation right across the business, from market signalling through to operations. This is no new thing, particularly in the front office, but the growing demands of investors, regulators, and even staff mean that hedge fund spending on technology is only going to increase. Therefore, it is imperative that you do this intelligently if your organisation is to keep up with the pack.

With that in mind, here are five areas to focus on in the drive for automation in hedge funds over the next year:

1. Adopt the Mindset of Technology Firms

For many hedge funds, given their relatively lean operating models and reliance on technology, some hedge funds are adopting the mantra of “a technology firm that delivers investment returns”. Placing data and technology at the top of the agenda will drive innovation and collaboration, paving the way to save valuable time by adopting intelligent software.

2. Build From the Foundations of Data

With the right mindset adopted, build from the bottom up by truly understanding your data flows across the organisation. This is especially important as the amount and types of data used by hedge funds continue to grow. Understand where the ‘golden copy’ of truth is for each of your datasets, and use a data integration layer to consolidate, standardise and re-distribute them to the right systems. From there, you will have a consolidated view of what your data needs are across the business, and can start to scale from a common point of departure. Hedge funds are beginning to realise the huge potential their third-party datasets (such as from Fund Accountants and Transfer Agents) can have for automation, but do not necessarily have the technical infrastructure to efficiently consume and manipulate them.

3. Streamline to Achieve an Efficient, Scalable Operating Model

After establishing robust foundations, you can start looking across your value chain to identify streamlining opportunities. Too much time is still spent collecting, preparing and checking data, which limits the opportunities for value-add modelling and analysis. Artificial intelligence and machine learning are increasingly available but not sufficiently used, although the adoption of low-code platforms is becoming more commonplace. The potential benefits of these techniques include: greater data lineage and transparency, better risk management, and a reduced reliance on manual workflows. The concept of ‘operational alpha’ is increasingly being sought by hedge funds, for example by leveraging custodian data to automate factsheet production, returns calculations or exposure views across clients.

4. Deploy tools to deliver consistent outperformance

As turbulent market conditions persist, a laser focus on returns is key. Your data and technology architecture should enable a clear delineation of duties between solely seeking alpha, and running the rest of the business as efficiently as possible. Investment into Front Office and trading technology isn’t new, but you should identify the aspects of your investment process that give provide a competitive edge, and commit effort and resource to the latest tools and techniques to drive alpha. For example, developing automated market signalling that indicates potential opportunities and risks based on client and user-defined exposure criteria – several FinTech solutions already exist that scrape alternative data sources such as social media to glean investment sentiment.

5. Delight clients with data-driven interactions

Finally, look externally to the increased demand from clients for slicker interactions, and the commercial imperative of hedge funds to proactively deliver those ‘moments of delight’. From the initial onboarding process and capturing investment preferences, through to monitoring performance and processing subscriptions and redemptions, many of a fund’s client-related workflows are still highly manual. A shift towards more digital interactions is underway, such as the use of bespoke widgets that both allows clients to define what they want to see, and funds to glean insights from what is actually being read.

We expect these trends to accelerate over the course of 2021, driven in part from investors (improving interactions), regulators (enhancing disclosures), and staff (optimising workflows). Those who make the right investment in data and technology now will distinguish themselves as leaders, while building resilience and realising efficiencies right across their value chains.

Alpha is a leading consultancy to the asset and wealth management sector with over 450 consultants based across the US, UK, Europe and APAC. We work with leading Hedge Funds and Alternative asset managers, providing services across the investment lifecycle. For more information on how we can help you, please contact Mark Thomas.



About the Authors

Matthew Pratt
Matthew Pratt

Matthew is a Manager at Alpha and part of Alpha’s Alternatives practice, focusing on the Hedge Funds client segment. He has experience in financial services data and technology across our Investments and ESG practices, having worked on vendor selection and implementation programmes, and operating model strategy reviews.

Mark Thomas
Associate Director

Mark is an Associate Director at Alpha leading work across Alpha’s Alternatives client base. He has extensive experience working with Hedge Funds and Private Assets clients, helping them solve business-critical challenges and develop market leading operating models.