Amid the Pandemic, Hedge Funds Grapple With Investments in New Tech and Alternative Data
Some are, some aren’t, when it comes to new tech spend.
The Covid-19 pandemic shifted the professional world to the online office. Yet despite the demands of the virtual space, only around half of hedge fund managers are spending money on new technology.
According to a recent survey from the Alternative Investment Management Association, Simmons & Simmons, and Seward & Kissel, 47 percent of hedge fund managers answered “no” when asked if they were investing in new technologies.
Those who answered “yes” are focused on one major trend: alternative data.
In the survey, hedge fund managers and investors were asked a series of questions about the health of, and trends in, the hedge fund industry. The survey, which gathered data during the fourth quarter of 2020, asked questions of over 300 industry professionals, a majority of whom were hedge fund managers accounting for an estimated $1.3 trillion in assets under management.
“The industry is investing in technology — period,” said Tom Kehoe, managing director and global head of research and communications at AIMA, in an interview. “Across the board, hedge funds were using technology more in the past 12 months. If we look at the next 12 months, our sense is that the industry will double down on the use of technology.”
There’s a dominant factor stoking the division in tech investing: size.
Over half of firms with less than $1 billion in assets under management aren’t investing any money into new technologies, while 48% of larger firms (with more than $1 billion in assets under management) are investing in tech, specifically in alternative data.
Kehoe said he attributes this division to the capabilities of large firms to use data. While such firms may be able to fund alternative data projects, small firms may not be able to manage the expenses of data scientists, platforms, and third-party providers. Despite these costs, Kehoe said researchers believe alternative data use will be stream-lined across the industry in the future.
“All of these things will be expensive,” Kehoe said. “But what we say in that report and what we hear more, is that the use of alternative data is going to be across the board, small and large, not just in the systematic-type strategies, but also in those fundamental strategies. It’s just part of this whole influence that technology is bringing to bear across, not just the hedge fund industry, but wider society.”
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For both small and large firms investing money into tech, the bulk of investments are in alternative data. Although the survey does not specify the managers’ uses for alternative data, an October 2020 Bank of America survey found that web-scraped data ranked highest in popularity among investors followed by geo-location, social-media, and credit-card data, Institutional Investor reported.
The AIMA study also revealed a hedge fund industry relatively untouched by the pandemic — two out of three hedge funds reported that performance is above or within their target level of returns — and strong levels of confidence in the future of the industry.
Seventy percent of participants cited positive, confident attitudes regarding the future of their firms, according to the report.
Other key findings include increased alignment of interests between hedge fund managers and investors, increased allocations to hedge funds, and increased demand for — and interest in — Environmental, Social, and Corporate Governance strategies.