Hedge funds are increasing spending on risk management as concerns about regulatory challenges grow, according to a global report by Beacon Platform Inc. The survey reveals that 99% of hedge fund managers surveyed in Beacon’s study—spanning the U.S., U.K., Germany, Switzerland, France, Italy, Sweden, Norway, and Asia, with collective assets of $901 billion—indicate their funds will increase spending on risk management in the next two years.
Specifically, 56% state that costs will rise by 20% or more, according to Beacon’s study. The open and cross-asset portfolio analytics and risk management platform also noted that most managers are concerned about their ability to address regulatory challenges: around 56% believe it will become more difficult over the next three years, while 39% expect pressure to decrease. Furthermore, C-level executives are nearly twice as likely to believe that regulatory challenges will intensify (73%) compared to their peers in Investment Analysis or Portfolio Management (38%).
A key finding is that transparency emerged as a significant issue in the study: 90% of respondents admit that transparency provided to clients and investors needs improvement, with 23% stating that it must improve drastically. Regulators are seen as the primary drivers of increased data transparency, but industry trade bodies and hedge funds themselves are also promoting greater transparency.
Another striking finding is that, in general, hedge funds are satisfied with their risk management systems but identified certain areas of concern: about 33% said their systems were only average in latency (the ability to perform complex calculations in an acceptable time), 30% rated them as only average in accuracy (the ability to mark-to-market and use industry-standard models for all products), and 5% rated them as poor.
Additionally, about 22% rated their systems as only average in transparency, and 6% as poor or very poor. More than 26% stated their systems were average in flexibility, with 2% calling them poor. Of those who rated their systems as poor, 82% plan to replace them in the next 12 months, while 65% will use additional systems to compensate for weaknesses.
Investments in systems have yielded results for funds that have made them: around 55% of those reporting improved risk visibility in their funds over the past two years attribute this to increased investment in technology, while 47% credit specialized third-party providers.
In light of these findings, Asset Tarabayev, Head of Product at Beacon Platform Inc., stated, “As regulatory challenges increase and clients demand greater transparency, our research shows that hedge funds are preparing to address these concerns. Spending is expected to grow across the sector as funds aim to leverage the advanced reporting capabilities of modern risk management and portfolio analytics systems to improve transparency for both investors and regulators. Funds leading in technology are already benefiting from these advanced technical capabilities, enhancing the transparency of analytical models, accelerating compliance times, and offering real-time views of risk limits and exposures.”
