Changing hedge fund strategies in the switch to private capital

CSC attended the recent With Intelligence HFM Billion Dollar Leaders Summit in New York. Marshall Saffer, managing director of CSC Global Fund Solutions, and Michael Dittenhoefer, CSC’s senior business development manager, discuss the key takeaways from the conference.

The With Intelligence HFM Billion Dollar Leaders Summit is a regular date on the calendar for operational executives from some of the largest hedge funds in the US and beyond.

May’s event came at something of a crunch point for the industry. Against a backdrop of rising interest rates, economic uncertainty, and geopolitical tension, hedge funds are refining their strategies and looking for operational efficiency.

It was a thought-provoking conference. Here are four key takeaways.

1. The switch to private credit and private debt investment is accelerating

A major theme of the conference was that, in a flat market, hedge fund managers are diversifying to chase returns. That has been happening for years, but the switch to hybrid strategies is gaining pace.

Private capital and private debt are the obvious destinations for new investment. Funds moving into the space are filling a liquidity hole left by the banks, and there are plenty of businesses looking for loans.

This shift to private credit, however, is not easy. Some managers do it through a sub manager—allocating their private capital business to a specialist in the field—but that means splitting the returns. Others build a team and do it themselves.

In both cases, the message from the conference was clear. Private credit is a complex asset class. It requires commitment. To succeed, you need to know exactly where the money is coming from and how you will manage the operational upheaval.

2. Talent is still in short supply, leading to increases in operational outsourcing

Moving into new strategies requires people with the right knowledge and specialist skills.

As hedge funds look to diversify, they’re running into a familiar problem. Where do you find the right people at the right price when everyone else is fishing for the same talent?

The short answer is: with difficulty. That’s been true since the pandemic-inspired Great Resignation, and it remains so today.

The talent shortage is a problem that refuses to go away. The growing popularity of operational outsourcing is partly a reaction to this ongoing challenge. We cover this issue in depth in our Halo Framework report.

3. The choices for hedge fund software and technology are huge and varied

Talent is one side of the equation. When you move into a new strategy, you also need appropriate technology. But what to choose? There are scores of solutions and software salespeople know how to talk a good game.

Examining the technology should be a central part of your vendor due diligence.

It is not just about whether a system does what you need it to do. Your analysis should also consider vendor support, ease of use for your IT team, and whether the system integrates with your other solutions.

And it should also consider what’s coming next. A technology solution should meet your needs right now and also in two or five years’ time.

Ask every vendor about their product roadmap or upgrade plans. How will they tackle challenges that are still around the corner?

As they move into new strategies, it’s essential that hedge funds get the technology right. To that end, a technology agnostic outsourcer can help.

4. The vendor ecosystem is changing

Of course, due diligence isn’t just about technology. It is also about culture, people, and processes. Good vendors should be partners. The vendor ecosystem is changing.

Those partnerships aren’t as easy to come across as you might expect, because many vendors are primarily revenue driven businesses with a short-term outlook.

But managers who are shifting strategies and chasing operational efficiency need long-term relationships with providers who offer a consultative service alongside technical skills. Secure private businesses—CSC is one—are more likely to fulfil this role.

Again, it’s vital to question prospective partners about product and service roadmaps. Are they anticipating future challenges? Environmental, social, and governance (ESG) reporting is one example. Funds of all kinds continue to struggle with identifying, gathering, and reporting the right ESG data. But ESG is only likely to grow in importance, especially as hedge funds become lenders. So can a partner help?

The shift to private capital proved a key theme of the event—along with the opportunities and challenges that come with it. What’s clear is that hedge funds are looking for help as they chase returns into unfamiliar territory.

Why CSC?

• CSC services include accounting, legal services, regulatory reporting, fund administration, substance, and tax compliance.
• We currently deliver services in over 140 global jurisdictions, so we are where you need us to be.
• CSC is the trusted partner of more than 90% of the Fortune 500. We’re the business behind business.