Hedge funds around the world are ramping up their technology spending to provide better service to the growing mix of institutional clients they serve and to ensure they're well prepared to adequately meet increasing compliance and regulatory requirements.
In North America, hedge fund IT spending will grow at a compound annual rate of 4.4% through 2014 while counterparts in Europe and Asia will increase their technology investments by 5.6% and 7.2%, respectively, per year for the next three years, according to a new report from Boston-based financial research and consulting firm Celent.
The report, titled "Hedge Funds 2011: Navigating Tumultuous Waters," cited a number of factors for this resurgence in IT spending by hedge funds including new registration and regulations birthed in the aftermath of the Dodd-Frank Wall Street Reform Act, changes in the over-the-counter market structure and, most important, strong demand from institutional investors who demand a higher level of demonstrable operational infrastructure and controls from hedge funds.
"We see a cleansing effect," said Cubillas Ding, Celent's research director and coauthor of the report. "The crisis shrunk the industry, but the bounceback is putting the industry back on a reasonable growth trajectory."
"Hedge funds will need to embrace a converged set of capabilities," Ding added. "For firms with ambitions to gain a larger share of institutional capital flows, a coherent service architecture is crucial in achieving scale economies."
On Monday, Boston-based financial services research and consulting firm Aite Group noted that global hedge fund assets rose to more than $1.92 trillion worldwide at the close of 2010, putting demand almost on par with the industry's record peak of $1.93 trillion in 2008.
For the first time in 2010, institutional investors eclipsed high net worth individuals as the largest hedge fund participants, contributing 61% of all assets last year compared to just 48% in 2008.
Celent researchers expect the majority of new hedge fund IT spending will initially go toward system maintenance once the SEC, FINRA and individual states clearly articulate their specific compliance and disclosure requirements.
"High priority items in 2011 include risk analytics, risk monitoring and control, legal and compliance, reporting, pricing and valuation, collateral management, liquidity risk management, performance measurement and attribution, and front end growth investments (i.e., algorithmic trading and smart order routing)," the report said.
Finally, Celent researchers predict hedge funds will increasingly outsource many of these critical IT projects and advises technology vendors to increase the number of off-the-shelf products that hedge funds and other financial service firms can then customize for their specific needs.