A recent study jointly conducted by KPMG, the Alternative Investment Management Association (AIFA), and Managed Funds Association (MFA) surveyed 100 managers of global hedge funds totaling US$300 billion in assets under management. Entitled Transformative Change: How innovation and technology are shaping an industry
, it aimed to find out how hedge fund managers think their industry will be affected by technology, and what they are doing to ride the incoming wave of innovation.
Results of the study showed 58% of respondents forecasting that artificial intelligence will have a “medium to high” impact on fund management over the next five years, with one respondent citing “a very strong business case for replacing humans with algorithms in a lot of areas of the business.” It was also found that 32% of hedge fund managers polled already use predictive analytics to discover new trends and opportunities.
However, respondents are not uniformly excited about potential developments in technology. The majority of participants showed little interest in using blockchain technology as a digital currency platform (although they are likely to be using it to provide faster and safer transactions). Sixty-seven per cent of managers who participated in the survey also predicted that automated trading technologies – which some say have caused inefficiencies and inequalities in securities markets – will have “some impact” on hedge fund returns over the next five years.
Virtually all (94%) expect technology to affect competition over the next five years, with benefits anticipated from investments in various front-, middle-, and back-office functions. There seems to be more advanced application of technology among larger funds: funds that have AUMs exceeding $US5 billion are more than twice as likely to categorize their tech environment as “innovative and nimble” than smaller firms. Similarly, funds whose AUMs are below US$500 million are more than twice as likely to admit that their middle office technology is outdated.
What are the top reasons for investing in technology at present? Topping the list at 90% is “improved controls and compliance,” followed by “efficiency objectives” at 88%. Less significant are “investor expectations,” “improved competitiveness,” “cost reduction,” and “reduced complexity,” with 3% citing other reasons.
As for the approach taken towards technology adoption, smaller funds with AUMs of US$5 million or below tend to prefer outsourcing, while funds that manage assets worth US$5 billion or more tend to opt for internal technology development. As for mid-sized firms, the study found a slight tendency towards using existing platforms and services.
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