Confidence amid regulatory challenges


Confidence amid regulatory challenges

The 10th annual EY Global Hedge Fund Symposium took place in December 2013, featuring a number of keynote speakers from the industry. Regulatory and reporting requirements were some of the main concerns discussed amid a background of confidence about the future.

Growth and operational efficiencies are a key focus for hedge fund managers in the year ahead, according to leading figures in asset management industry. Albeit confident about the continued climb of the industry, challenges were also noted as regulatory and reporting requirements continue to play a dynamic role in business decisions.

Speaking at the 10th annual EY Global Hedge Fund Symposium on December 12, 2013, Natalie Deak Jaros, partner and co-leader of the EY Financial Services Office hedge fund practice in New York, and Jeff Short, EY partner and wealth and asset management sector leader for the Bahamas, Bermuda, British Virgin Islands and Cayman Islands practices, agreed that growth and operational efficiencies are a top priority for fund managers.

Discussing the results of the EY Global Hedge Fund Survey—an annual survey that captures the opinions of hedge funds and investors worldwide—Jaros and Short outlined the strategic priorities for fund managers in 2014.

Focus on growth

“Key channels for growth will include developing new strategies and products as well as additional distribution networks, and upgrading intellectual capital to improve performance,” said Jaros.

Short added: “Having already largely outsourced back office functions, hedge fund managers are now seeking additional operational efficiencies by outsourcing other non-core activities, specifically technology, legal and compliance, and middle office functions. However, it is key for managers to select the right outsourcing provider to allow them to keep headcount increases at a moderate level and achieve an even better back to front office full time equivalent (FTE) ratio.”

Short also noted that although shadow accounting continues to be an area that managers are hesitant to eliminate, a growing number of managers have developed stronger relationships with their fund administrators and are scaling back their shadowing operations.

Margin pressure

While the survey concluded margin compression was felt across the board, it was noted that the largest managers are reaping dividends from product diversification. “Smaller managers tend to have leaner operations that can support a single strategy while larger managers have the scale to best leverage infrastructure. We are seeing the mid-size managers are caught in a swampy middle ground between these groups,” said Jaros.

Investor appetite

“When investors were asked what changes they anticipated making to their hedge fund allocations in the next several years, more than 70 percent of investors expected no change. With a limited number of institutional investors looking to increase their allocations to hedge funds, competition is growing and only the fittest will survive,” commented Short.

He added: “Over the past few years, 44 percent of investors have shifted from intermediaries and invest directly in fund managers. As the direct investment trend continues, an increasing proportion of fund managers expect that they will work with investment consultants in the coming years. This has meaningful implications for manager marketing strategies and service models.”

Insurance-linked securities

"For the model to be sustainable the ILS market will need to look beyond traditional perils."

Insurance-linked securities (ILS) also formed a key component of the hedge fund discussion. “The convergence space has grown rapidly, and continues to do so thanks to increasing interest from pension funds and sovereign wealth funds. But for the model to be sustainable the ILS market will need to look beyond traditional peak zone wind risk and earthquake perils and expand into territories where risks are less well known,” said Craig Redcliffe, EY partner specialising in ILS.

“There are some challenges associated with this as pension funds expect a proven track record before they will invest. However, this can be overcome in one of two ways: use seed investing to develop a track record or partner with a reinsurer who already has a strong line of credibility,” Redcliffe explained.

“Given the changing dynamic of the investor base, the increasing acceptance of ILS as an asset class, and the sheer size of global pension assets, the future looks bright for ILS,” he concluded.

Event speakers joining EY executives in delivering to the audience of 200 included Liz Frederick, director of ILS insurance management, Aon; Brenden Barry, chief underwriting officer, Greenlight Re; Jennifer Wood, head of asset management regulation, AIMA; Jon Fowler, global head of investment funds, Maples and Calder; MLA Roy McTaggart, Financial Services Councillor; and Commissioner of Police, David Baines.

Thomas Wagner, co-founder and managing member of Knighthead Capital Management, LLC, and EY Cayman alumnus, delivered the keynote address on the global impact of quantitative easing.

EY Global Hedge Fund Symposium, Regulatory, Natalie Deak Jaros, EY, Jeff Short

Cayman Funds