15/04/2023

Tapiwa Hedge FundIndustry Overview

Tapiwa Manjengwa

Q1 2010

Trends in the HF Industry

Increased Outsourcing

“Confronted with tighter margins and looking for ways to cut costs, an increasing number of money management firms are outsourcing such back- and middle-office operations as investment accounting, performance measurement, reconciliation, compliance reporting — all the daily tasks apart from making investment decisions and executing trades. Custodian banks and other vendors can provide these services less expensively because their technology, infrastructure and personnel costs are divided among multiple clients...”

By Julie Segal

Source: Institutional investor Magazine December/January 2009 Issue

Trends in the HF Industry

Greater Scrutiny and Regulatory concerns

NB: Madoff NOT a HF but guilty by association as he tapped several F-o-F investors for capital (who in turn failed their investors through lack of proper due diligence and risk management)

DB Report in March 2009 ranks risk management as one of the top 3 consideration for Intuitional Investors

15/04/2023 "Redefining Risk Management"

2009 DB HF Industry Survey

• Risk management moves to being the second most important factor when selecting a manager.

• Transparency joins the top 5 manager selection criteria. Historically, investors have indicated the “3Ps”: Performance, Philosophy and Pedigree to be the most important characteristics when selecting a manager. However, this year (2009),

Risk Management has displaced Philosophy as the second most important criteria and Transparency is now fourth, pushing Manager Pedigree to fifthPlace.

Trends in the HF Industry

Pressure on Fees

“Power Shift from Star HF managers to Investors” who have the cash”

“2 /20 Norm” {2% mgt fee – 20% performance} Not so standard

"Expenses are at 2008 levels, but revenues are more like 2001 to 2003,"

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• Real time = Right time to manage Risk

Trends in the HF Industry

3 – Real-Time systems – In this new world of opportunistic alpha, hedge fund managers can no longer afford to rely on systems that offer "T+1" reporting. As noted earlier, legacy technology that can only offer this type of end-of-day and end-of-month reporting will become less relevant and ultimately be outsourced to third-parties. Hedge fund's instead will focus their resources on real-time systems that can aggregate risk and return across multiple prime relationships and multiple asset classes. Increasingly we will see the desktop of a hedge fund trader/portfolio manager feature only 2 types of real-time FIX based systems: 1/ Those connected to implementing the investment decision (i.e. execution management systems), and 2/ systems, that once an investment decision has been implemented, can offer a real-time understanding of risk and return (i.e. real-time portfolio management systems and risk management systems).

Source http://primebrokerageguide.com Three technology trends for 2009:

How to Benefit from the Trends

•Greater Institutional Investment.1. Emphasise benefits of Reputable, robust risk

management solution ina. Protecting /Attracting Assets in a competitive

market for capital b. Link To A Customer Service Best Practice

•Greater Scrutiny and Regulatory concernsa. Avoidance of Penalties and Reputational damage

by pre-complianceUCITS IV : Reporting

•Pressure on Fees1. Emphasise – Low total cost of ownership

•Increased Outsourcing 1. Emphasise – Low total cost of ownership2. Partnership with knowledgeable advisor

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Hedge Funds Problems to be solved • Considerable investor pressure for more

transparency in the investment process

• Siloed and inconsistent risk management practices across portfolios

• Need to preserve capital in down market

• Highly competitive environment to raise new capital

• New products – want to take advantage of opportunities with distressed assets

• Limited budget and resources for new technology investments

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Benefits of a Risk Management Solution

• Facilitate the creation of a risk culture– Appeals to the entire organization

– Standardize the process of communicating risk information to all participants

• Provide reliable risk information Generate accurate risk measures that are consistent across all asset

classes and investment horizons

• Present comprehensive risk information

• Reduce GUI usage anxiety Most of the complexity inherent to the computation of advanced risk

measures has been decoupled form the user interface