- Increasing investor sophistication is driving transparency.
- Back-office functions now play a greater role in investor relations than ever before.
- Cyberattacks are a real and growing threat.
- The black box is not a strategy anymore; investors need to understand the process.
- Allocators, not managers, are now the stars who build a diverse portfolio.
Several significant trends are taking place in the hedge fund industry. Foremost among them is the demand for transparency by increasingly sophisticated investors. Following are highlights of a conversation with John Hague, lead partner in RSM US LLP’s national financial services practice; Ed Coyne, executive vice president at Sprott Asset Management; Jeff Silverman, president and head of business development at AlphaParity; and moderator David Snow of Privcap.
The drive for transparency
The hedge fund industry has changed dramatically over the past decade or so, largely as a result of enhanced SEC regulation, but also due to increasing investor sophistication. One of the biggest changes is transparency, as clients and investors want to see managers who are willing to open up their books and say what a hedge fund is investing in—and why. It’s not just at the institutional level—the sophistication of small and medium investors is much higher and their level of due diligence is far deeper than ever before. The movement towards increased transparency isn’t just good for investors—in the long run, it’s good for the industry. When all hedge fund managers are put under the hot light, the real professionals will shine.
The back office must now be front-facing
Because due diligence is being performed on an ongoing basis, what goes on in the back office can no longer be shrouded in secrecy—and the responsibility extends well beyond the CFO suite. “Investors are talking to the assistant controllers and the people who are actually pushing the buttons and executing the trades,” says RSM’s John Hague. Investors are getting into the details. “They want to know what the variables are and how you get the completeness and accuracy of the variables.”
The threat of cyberattacks is real and growing
Hedge funds are a lucrative target. Hackers might go after a fund’s portfolio information, or they might steal details of investor accounts. “There are stories out there about hacks of fast-trading firms,” Hague says, where cybersecurity breaches are actually getting ahead of some orders and taking advantage of that before the orders even hit the exchange floor. Breaches can put both the investment side and confidential investor information at risk.
The black box is not a strategy anymore
Hedge funds have traditionally kept their proprietary trading strategies secret—and investors have traditionally not complained. But with hedge funds underperforming equities and bonds, investors are no longer content to hand over their money and hope for the best. They want to understand the process, from risk management to decision-making to the sizing of positions.
Allocators, not managers, are now the stars
It’s no longer enough to show up to a pitch meeting with a big investor and introduce the new star manager. These days, the allocator has the mandate from the investment committee to build a truly diversified portfolio. In addition, there has been a return to more collegial relationships with clients. The client-service role has become elevated substantially—one more sign of the trend towards transparency.