With approximately $156 billion in assets under management (AuM)¹, investor appetite for Asia-based hedge funds continues to grow as allocators increasingly rebalance their portfolio exposures towards the region. With persistently low interest rates in North America and Europe suppressing returns, institutions are looking to capitalise on the economic recovery underway in Asia - together with some of the untapped opportunities available in China’s recently liberalised capital markets. Performance and capital raising have been solid across Asia-based hedge funds, but the industry is not acting complacently.

In fact, many firms are now making material improvements to their client communications, workflow processes and data analytics. They are doing this either by digitising and automating existing manual, paper-based activities or adopting new technologies. Broadridge examines how Asia’s burgeoning hedge fund managers are using technology to augment and future-proof their businesses.

Hedge Funds on a Digital Transition

The pandemic has accelerated hedge funds’ wider adoption of technology, with 30% of senior executives from Hedge Funds globally telling the 2022 Broadridge Digital Transformation and Next-gen Technology Survey of 750 C-suite executives on the buy side and sell side that they have increased the pace of adopting new technology. So how are APAC’s hedge funds integrating technology? Digitalisation is playing an integral role in improving the client experience. A growing number of institutional clients are demanding that managers communicate with them through digital channels, whereby performance and risk data is conveyed to them on a more real-time basis via mobile devices and apps. This is in marked contrast to past practices when performance and risk metrics were typically reported by hedge funds only periodically to their clients - often through email or physical correspondence.

Conscious of these changing investor dynamics, hedge funds are making significant improvements to their in-house technology infrastructure. Across the globe 96% of managers told Broadridge that they are either in the mid or advanced stages of implementing a shift away from paper-based processes towards digital communications. In addition, 95% of global firms said they are either in the mid or advanced stages of developing seamless, omni-channel client experiences across multiple devices. And 45% of all hedge funds noted they are either at mid or advanced levels of building micro-personalised marketing and communications that are unique to each individual user. 

Many hedge funds are also embracing technology to deliver firm-wide efficiencies in their workflows, processes, and operations. This comes as investment firms of all types face growing operating costs – owing to regulation, added reporting requirements and overheads arising from COVID-19. One way firms can reduce operating costs is through automation. By removing inefficient, error-prone manual processes and replacing legacy infrastructure in their operations, firms can net significant savings and reduce risk. Hedge funds are clearly taking note, with 80% of managers telling the Broadridge study they are either in the mid or advanced stages of implementing a modern IT platform. A further 74% said they are either in the mid or advanced stages of digitalising processes and taking a data-driven approach to analysing processes to drive efficiencies.

There is also a strong appetite in Asia to mutualise critical but non-differentiating functions such as back-office processing to reduce costs and risks.

More hedge funds in the region are also widening the scope of their investment strategies – with many increasingly transitioning into private markets as they look to diversify and benefit from uncorrelated returns. It is therefore vital that they work with leading technology providers - who offer scalable solutions and multi-asset class coverage.

Data and analytics tools are also critical in supporting hedge fund growth. The use cases for making better decisions with data are extensive, and can be applied in investment decision-making, operations and investor relations. If analytics and visualisation tools are to drive effective strategies, the data underpinning them needs to be organised in a structured, systematised and holistic format, that can be easily accessed across the entire business. However only 11% of global hedge funds told Broadridge they were at the advanced stages of implementing a centralised data platform. This starts to allow previously siloed parts of the business to access a consistent store of data, but can be a heavy lift to create and manage.

Some forward-thinking managers are even making use of more advanced predictive analytics techniques – which are being applied in operations as well as investments. For instance, the Broadridge study found 35% of global hedge funds were either in the mid or advanced stages of using data for predictive analytics and other forms of advanced analysis. Funds can use these methods to fine-tune investment decisions (and bolster returns), facilitate compliance with ESG (environment, social, governance) mandates and improve operations. For example, some hedge funds are using predictive analytics to comb through historical data to identify the causes of trade breaks. As hedge funds look to amplify performance and rationalise costs, many are turning to data analytics.

However, the adoption of new or disruptive technologies is not without its challenges, something the region’s hedge fund industry fully recognises. The Broadridge report found that 50% of hedge funds said their greatest challenge in driving digital transformation was keeping up with the pace of technology change, followed by concerns about modernising IT infrastructure among 24%. A further 20% admitted that their organisations did not have adequate access to quality data to drive digital transformation. Despite this, a decent proportion of Asia-based hedge funds are leveraging cloud and AI (artificial intelligence) solutions to drive digital transformation. Many believe that AI could help bolster returns at hedge funds as the technology can autonomously analyse vast data sets beyond just company and market financials. They can then identify trends in the data that shape investment decisions.

Despite firms adopting other next-gen technologies, only a small proportion of Asian hedge funds are adopting Blockchain, even though the technology could support the industry in regards to managing complex assets. There is reason for optimism though as the study found a majority of managers reckoned they would deploy Blockchain within the next two years.

Evolving for the Future

Hedge funds are enjoying a period of strong growth, as investors seek out superior returns and diversification to insulate their portfolios against inflation risk, interest rate rises and volatility. Hedge funds are conscious – however – that digitalisation is critical if they are to win lucrative client mandates, manage operations in a cost-effective way, and ensure smart decision-making. It is therefore essential to have a clear vision and strategy for digital transformation to succeed in this new more demanding environment.