Hedge Funds 2011: Navigating Tumultuous Waters

by Alexandra Lin,  Cubillas Ding, March 22, 2011
Industry Trends
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

Hedge fund IT spending in North America is expected to grow at a compound annual rate of 4.4% (US$231 million) from 2009 to 2014, with Asia estimated to grow the fastest at 7.2% ($36 million).

Although they have recovered from one of their most challenging periods, hedge funds are facing renewed uncertainties and pressures. The headwinds of scarcity of capital, OTC market structure changes, central clearing initiatives, and changing economics of prime broker relationships with hedge funds (e.g., from Basel regulations) are casting a cloud. At the same time, the continued institutionalization of investor flows is raising the bar for funds to not only deliver returns but also demonstrate robust operational infrastructure and controls.

In this report, Hedge Funds 2011: Navigating Tumultuous Waters, Celent charts the post-crisis reorganization of capital markets, its effects on the hedge fund industry, and its impact on hedge fund IT spending and technology priorities.

“We see a cleansing effect. The crisis shrunk the industry, but the bounceback is putting the industry back on a reasonable growth trajectory,” says Cubillas Ding, Research Director at Celent and coauthor of the report. “Hedge funds will need to embrace a converged set of capabilities. For firms with ambitions to gain a larger share of institutional capital flows, a coherent service architecture is crucial in achieving scale economies.”

For most hedge funds, the path to OTC derivative central clearing remains unclear and presents significant uncertainty as to how they will access the market. Ideally, hedge funds will be able to directly access central counterparty (CCPs). However, a significant number are skeptical, wondering if they will be allowed to become clearing members of CCPs, or whether capital hurdles will be significant. The majority of funds do not believe that central clearing will become a reality for another few years.

“For service providers and dealers servicing this sector, hedge funds are placing an emphasis on breadth of clearing, in terms of asset classes like credit default swaps and interest rate swaps, as well as an ability to clear multiple geographies in which they trade,” says Alexandra Lin, Celent Analyst and coauthor of the report. “Cross-margining is seen as a value-add, especially for more sophisticated hedge funds, as leverage comes back into the market and funds look to increase capital efficiency.”

Despite the gradual recovery of the economy and a few selected trading/risk management investments, technology spending is expected to be muted. The overarching strategies for technology investments in 2011/2012 will be to realize efficiency wins from existing applications, while lowering maintenance costs and spending on new technology.

The 52-page report contains 22 figures.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

Aftermath of the Financial Crisis

6

 

State of the Market

6

 

Pressure Points

8

 

OTC Derivative Market Structure: Changes, CCPs, and Impact on Hedge Funds

18

 

Outlook and Longer-Term Structural Developments

19

Technology Update and Market Segmentation

28

 

Hedge Funds and Technology

28

Hedge Fund IT Spending Trends

40

 

The Universe Covered

40

Looking Forward: Emerging Dynamics, Winners and Losers

46

 

Final Thoughts

48

Leveraging Celent’s Expertise

49

 

Support for Financial Institutions

49

 

Support for Vendors

49

Related Celent Research

50

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