As the overall level of market risk increases and hedge funds toughen their risk parameters, they will increasingly turn to third-party organisations for support on managing risk, with cost control and efficiency the key drivers for the shift, new global research by Beacon Platform Inc. shows.
Nearly nine out of 10 (86 per cent) questioned say they expect the use of third-party providers to increase over the next five years, with 26 per cent predicting a dramatic increase, the study by Beacon Platform Inc. with 100 hedge fund executives in the US, UK, Germany, Switzerland, France, Italy, Sweden, Norway, and Asia responsible for a collective USD901 billion assets under management found.
Respondents highlighted cost, efficiency, and subject matter expertise as the top three factors behind the increase in outsourcing to third parties. However, the research for Beacon, the open and cross-asset platform for portfolio analytics and risk management, found outsourcing is not the only action hedge funds are taking to address risk management concerns.
As they try to better understand and increase visibility of portfolio risks and exposures, all hedge funds questioned said they are likely to switch vendors for some or all of their trading and risk management software over the next two years. And around 23 per cent are very likely to switch.
Among those who have seen an increase in risk visibility, nearly 55 per cent ranked greater investment in technology as a key factor behind this, while nearly 47 per cent ranked greater use of third parties who specialise in this area as a reason.
When asked what other actions funds are taking to address any skills gaps in risk management, the study for Beacon found around 72 per cent are increasing the level of training, 54 per cent are outsourcing more, and 52 per cent say they are increasing their IT budget.
Andrew Dunlop, Senior Product Manager at Beacon, says: “Risk management is crucial for hedge funds and our research shows that the industry is taking multiple steps to boost their capabilities. While they are increasingly looking to third-party providers to provide support, outsourcing is not the only solution. Hedge funds are simultaneously increasing investments in training and technology, and many are looking to recruit from a wider range of industries to help enhance their risk management skills gaps.”
