HedgeFintech – Adopt or Die?
By Cyrus Fazel, Founder of Swissborg.
Back in 1940, Alfred Winslow Jones, the father of all Hedge Funds, disrupted the entire fund management industry with his harder, better, faster, stronger investment methodology. A few decades later, inspired by this spirit, hedge funds emerged as the elite leader of the investment industry.
Without exception to the recurring rule of leaders, Warren Buffet once said “Chains of habits are too light to be felt until they become too heavy to be broken”. Hedge funds are being disrupted by technology, namely transparent investment solutions and AI, as well as a new regulatory framework.
Representing an advanced indicator of that new trend, Goldman Sachs has shifted from a one-stop-shop to a knowledge-based solution, employing over 9,000 programmers, data analysts, and scientists—the employees compose more than 25% of their workforce, rivalling the size of Facebook.
Transparency & Regulation
Pension funds, endowments and wealth managers, who are the main source of assets for hedge funds, are now being challenged by their clients. Historically, wealth advisors have been the rock that keeps clients steady through market turbulence, and they have also been the only gateway to investment products. Now, however, some clients are questioning the value of this role and relationship.
Technological advances and regulatory changes have brought transparency to the next level. Wealth managers need to offer effective client reporting and interaction, as well as live portfolio analysis, i.e. live reporting of positions, information and activity about a portfolio’s or individual investment’s performance. No longer is it acceptable for financial professionals to hold clients at arm’s length and to build trust solely on the notion that the wealth manager is an expert.
Consequently, hedge funds have to deliver a higher level of transparency to their clients in order to match end-client expectations and comply with the new regulatory framework.
Harder, better, faster, stronger, leaner, cheaper and tailored: that’s how startups are taking over the hedge fund industry. Have you ever consider investing in:
- An equity long & short strategy? There is a startup called SwissBorg.
- The famous currency carry trade strategy? There is a startup for that: WeltSparen.
- A selection of the most experienced hedge fund traders that can analyze technical market patterns? There is a startup for that: Eidosearch.
- DIY? There is a startup which helps you to become a successful hedge fund manager: Quantopian
And guess what? The risk-adjusted performance of these solutions is as robust as hedge funds but at a cheaper price.
Spreading knowledge, skills and technology to the world is nothing new; that’s the purpose of the evolution: to challenge the “status quo.” The question that remains is, what options does this leave for hedge funds?
If technology plays against them, hedge funds will have to focus their operations on what they do best: investment intelligence. By partnering with innovative FinTech, they can leverage the distribution power of the internet, data science to optimise risk management and new disruptive technology like blockchain to offer more transparency and efficiency to the reporting system. The best hedge funds have already realised that it’s time to change the battlefield. Numerai (Renaissance Capital) for example, externalises its strategy by building a network of data scientists to drive the investment policy of the fund.
Technology, as well as a shift in investors’ behaviour, will definitely pose significant challenges to the hedge fund world. But, equally, it will present great opportunities, distinguishing winners from losers.
Hedge funds that reshape their operating models around making smart partnerships, embracing technological disruption, will have a clear competitive advantage. At SwissBorg, we believe that the customization, automation, decentralisation, digitisation and optimisation (CADDO) philosophy will take over. Whilst technological uptake in the hedge fund community is in its earlier stages, we will one day very soon reach an adopt or die tipping point. Time to take action.