September 2017

Report Overview

Running a hedge fund business in recent years has been a battle for survival. If portfolio managers have been desperately seeking performance alpha, operations staff have had to be similarly ruthless in their hunt for operational alpha. Any basis point that can be squeezed, has been squeezed. If relocation to a less showy district makes sense, the move has been made. If new technologies have made it cost efficient to dispense with certain middle and back office roles, the axe has fallen. It has not been pretty. It has been necessary. Anything less will see a manager quickly overtaken or forced to liquidate. Founders from brand-name hedge funds have fared better than most, but even some of the industry’s hottest prospects have failed to deliver a platform for success.

After two decades of rich rewards and (relatively) easy pickings, a host of established hedge fund businesses have become bloated and inefficient. But implementing the necessary changes at this late stage is at best complicated, and at worst impractical. Little wonder then that so many firms are focusing their efforts to improve profit margins and manage costs on, first, new revenue streams and, second, squeezing their service providers. And they have found some relatively easy targets in administrators, who have themselves reaped similar rewards to their clients in the past without adapting to the new environment. HFM Insights expects auditors to be next on managers’ hit list, as more firms realise that an expensive ‘Big 4’ contract is only necessary for funds and fussy investors, not the management firm.

Success today, therefore, is as much about cost management as it is performance – the agents for both need to be at the top of their games for a firm to endure. But what also needs to change are mindsets. The current rate of technological advancement is such that hedge fund managers can no longer afford to build an infrastructure to last the next ten years – they need something that is flexible enough to be updated next month, next week and tomorrow. Today’s founders can build a firm designed to deal with contemporary challenges from day one, rather than spend the considerable time and resources needed to get an older infrastructure up to speed. Times are tough, but in that respect, at least, new managers have the edge.


Exhibits and Citations

Section 1 – Survival is insufficient

Exhibit 1.1: Current status of 100 ‘star’ hedge fund start-up firms by founder pedigree, 2017, HFMWeek, HFM Insights (Page 8)

Exhibit 1.2: Current status of 100 ‘star’ hedge fund start-up firms by investment strategy, 2017, HFM Week, HFM Insights (Page 9)

Exhibit 1.3: Current status of 100 ‘star’ hedge fund start-up firms by strategy and pedigree, 2017, HFM Week, HFM Insights (Page 10)

Exhibit 1.4: Average break even points for hedge fund managers with sub $500m in Aum, 2017, AIMA/GPP (Page 11)

Exhibit 1.5: Management fees vs. operating costs by hedge fund investment strategy, 2017, AIMA/GPP (Page 12)

Exhibit 1.6: Key annual costs for running a hedge fund business, 2017, HFM Insights (Page 13)

Section 2 – Internal costs

Exhibit 2.1: Price per square foot for office space in global hedge fund hubs, 2017, Colliers International (Page 15)

Exhibit 2.2: Average staffing costs within the global hedge fund industry, 2016, HFM Compensation Survey 2016 (Page 16)

Exhibit 2.3: A breakdown of the uptake of third party marketers and cap intro by manager size, 2017, HFM Insights (Page 17)

Exhibit 2.4: Proportion of domestic vs. foreign third party marketers, 2017, HFM Insights (Page 18)

Citation: Hedge fund flows and name gravitas – Joenväärä, Juha and Tiu, Cristian Ioan, 2017 (Page 18)

Exhibit 2.5: Manager opinions on whether industry fee pressure is easing, 2017 (Page 19)

Citation: Prime broker pressures, 2017, HFM Insights (Page 19)

Exhibit 2.6: Manager responses to fee pressure over the last 18 months, 2017, HFM Insights (Page 20)

Section 3 – External costs 

Exhibit 3.1: Service providers that managers successfully negotiated down on fees in the past 18 months, 2017, HFM Insights (Page 22)

Exhibit 3.2: Service providers that hedge fund managers have switched in the past 18 months, 2017 (Page 23)

Exhibit 3.3: Methods of hedge fund managers use to access new technologies, 2016 KPMG/AIMA/MFA Global Hedge Fund Survey (Page 24)

Citation: Alive & Kicking, AIMA/GPP Emerging Manager Survey, 2017, AIMA/GPP (Pages 24 and 25)

Exhibit 3.4: Hedge fund jobs vulnerable to the ‘tech takeover’, 2017, HFM Insights (Page 25)

Citation: Artificial intelligence in capital markets: the next operational revolution, 2017, Opimas (Page 25)

Citation: Digitization of asset and wealth management: promise and pitfalls, 2017, Create-Research and Dassault Systèmes (Page 25)

Exhibit 3.5: Fees managers deem acceptable to charge to the fund, 2017, HFM Insights (Page 26)

Exhibit 3.6: Margin improving methods hedge fund managers plan to use in the next 18 months, 2017, HFM Insights (Page 27)


About HFM Insights

HFM Insights is the new research and analysis service from Pageant Media, sitting within the company’s hedge fund intelligence network, HFM. The division produces research reports and analytical articles on a variety of topics in the global hedge fund industry, including business operations, investor relations, technology and regulation. Leveraging Pageant’s wealth of data and news sources, and with access to the HFM network’s vast membership, HFM Insights is uniquely positioned, offering exclusive surveys and expert commentary.

Report authors

Tony Griffiths
Head of Research
+44 (0) 20 7832 6649

James Sivyer
Senior Research Analyst
+44 (0) 20 7832 6648

Stuart M. Kinnaird
Research Analyst
+44 (0) 20 7832 6605