And so, to the crux of the matter. In 2018, which hedge fund managers feel in control of their prime brokerage relationships and where does that confidence come from? Having examined the forces at work and the context in which they play out, we finish by measuring how confident prime brokerage clients are in hitting revenue hurdles and receiving favourable pricing. What are the factors that make a manager feel in a position of power? Our final section provides the answers.
Though investor opinions are undoubtedly influential, their role in the manager-prime relationship still takes a back seat to manager actions. From the holistic view of a broker’s parent company to trading style and service consumption, the strength of a manager’s relationship with its prime relies on an increasingly complex and idiosyncratic mix of factors. In short, what works for one manager, will not work for others. This third section seeks to tackle these issues and, where possible, place them in context.
Any investor that expects its hedge fund managers to have a certain ‘tier’ of service provider indirectly hands providers in that bracket leverage over prospective clients. Following the financial crisis, this form of ‘stage one’ due diligence took on a new flavour, as investors redrew the lines for ‘safe’ prime brokers. This second chapter brings the story up-to-date. Do investors still expect primes of a certain tier and, if so, who makes the grade? Does ‘tier one’ even have an established definition? The answers to these questions offer additional insights into the balance of power.
As in any industry, the strength of a prime broker’s business is tied closely to the strength of its brand. Prime brokerage in general – and several providers in particular – have been in the headlines over the past 12 months and this report’s opening section seeks to identify where business, in terms of mandate AuM, and/or reputation have been affected. Because if one takes a hit, the other is sure to follow.
One of the biggest challenges for any COO is securing funding for new projects. Most CEOs and directors, especially at smaller hedge fund managers, are likely to prioritise short-term obstacles over speculative issues. Redirecting resources to technology upscaling is not an easy sell, but it is by no means the only barrier to automation. In this third section, we look at the issues preventing uptake and the drawbacks giving COOs – and CEOs – pause for thought.
From building systems and creating algorithms in-house, to outsourcing processes to specialist vendors, hedge fund managers large and small are pursuing a variety of strategies in their efforts to automate. In section two, we provide a benchmark for firms contemplating how best to build up their own automated operational infrastructure, examine automation’s effect upon hiring, and forecast where managers will go next in their quest to automate.
With the rapid pace of technological development and the increasing cost of running a hedge fund business, automation is becoming ever more widespread. But which types of manager are driving this trend? The first section of this report establishes the extent to which managers are automating their operations, the processes they are focusing on, and why they are doing so.
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