Hedge funds around the world are ramping up their information technology spending to provide better service to the growing mix of institutional clients they serve and to ensure they're well prepared to adequately meet increasing compliance and regulatory requirements.
In North America, hedge fund IT spending will grow at a compound annual rate of 4.4% through 2014, while counterparts in Europe will increase technology investments by 5.6% and in Asia by 7.2%, per year for the next three years, according to a report from consulting firm Celent of Boston.
The report, "Hedge Funds 2011: Navigating Tumultuous Waters," cited a number of factors for the resurgence in IT spending. They include new registration and regulations in the aftermath of the Dodd-Frank Act, changes in the over-the-counter market structure and, most important, strong demand from institutional investors who want a higher level of demonstrable operational infrastructure and controls from hedge funds.
The report was released March 22.
"We see a cleansing effect," Cubillas Ding, Celent's research director and co-author of the report, said in a press release. "The crisis shrunk the industry, but the bounceback is putting the industry back on a reasonable growth trajectory."
"Hedge funds will need to embrace a converged set of capabilities," Ding said. "For firms with ambitions to gain a larger share of institutional capital flows, a coherent service architecture is crucial in achieving scale economies."
On Monday, the consulting firm Aite Group noted that global hedge fund assets rose to more than $1.92 trillion worldwide at the close of 2010, putting demand almost on par with the industry's record peak of $1.93 trillion in 2008.
In 2010 institutional investors eclipsed high-net-worth individuals for the first time as the largest hedge fund participants, contributing 61% of all assets compared with 48% in 2008.
Celent researchers expect that the majority of new hedge fund IT spending will initially go toward system maintenance once the Securities and Exchange Commission, the Financial Industry Regulatory Authority and individual states clearly articulate their specific compliance and disclosure requirements.
Finally, Celent researchers predict hedge funds will increasingly outsource many of these critical IT projects and advise technology vendors to increase off-the-shelf products that hedge funds and other financial services firms can then customize for their specific needs.
