Hedge funds are famed for their lean operating models, which support their ability to deliver superior risk-adjusted returns to the investors that they serve. But this laser-sharp focus on overheads creates both challenges and opportunities for our members, particularly when it comes to dealing with the myriad and increasing regulatory requirements they are subject to. AIMA has been working with its manager members to explore how they are rising to meet these challenges and, in particular, the role played by regulatory technology (RegTech) in dealing with risk and compliance tasks.

To put into context the challenge, the typical headcount at an alternative investment manager in Europe is less than 20 people, an indication of the high level of operational efficiency that alternative asset managers seek to achieve. Inherent in this operating model is the need to outsource certain tasks or functions, relying on the skills and expertise of third-party service providers to ensure that fund managers can remain focused on managing investments and attracting new investors. 
 
Regulatory compliance is, unsurprisingly, one of the key areas where hedge fund managers have a keen interest in third-party solutions to ensure that the costs associated with rules and regulations – including obligations to create and monitor records, report data or transactions to the regulator or market, and have particular trading or risks controls in place – do not become a drag on business strategy. The trend of increasing regulatory prescription has greatly heightened the attractiveness of external solutions that can help reduce the burden on stretched in-house legal, risk and compliance teams. We spoke to our members to find out more about their experiences of this growing area of the ecosystem.
 
The first key observation that we heard was an important one: that firms do not necessarily expect the typical RegTech solution to substantially reduce the amount of time that is devoted to compliance work. Instead, the goal is often to focus existing resources in a better way. For example, putting in place a third-party system that supports monitoring for potential market abuse might in all likelihood necessitate new ongoing workflow associated with reviewing the alerts that the system generates. 

As such, it does not necessarily free up time for a legal or compliance officer, but does mean that they are using their time in a much more focused way, which is beneficial for the firm and its investors. 
 
It is also worth noting that successful integration of an external product also requires an upfront time commitment – firms that get it right are the ones that go beyond a mindset of ‘what will the provider do for us?’ and instead think in terms of ‘what do we need to do to enable the provider to support us properly?’ The key dimension here is ensuring that in-house systems are properly configured to be able to provide the inputs necessary to allow a third-party solution to work effectively – most commonly this is a question of ensuring that the firm can feed the RegTech tool with the right information. As part of this, those taking a lead on putting in place new systems need to make sure they have got the necessary buy-in and input from their colleagues from across different functions to ensure the smooth implementation of a new solution.
 
A final theme that we have touched on in our discussions is that of system stability. Once an external system has been put in place it is important to ensure that systems and process changes – either on the part of the manager or the vendor – do not disrupt the proper functioning of the solution in question (which could potentially open the firm up to regulatory risk issues). 
 
So ultimately successful deployment of RegTech calls for a strong strategic approach, buy-in across teams and a laser-sharp focus on data and connectivity. It can offer vast improvements over legacy approaches that might be heavily manual and based on less sophisticated approaches, but this does not necessarily imply significant time saving. The goal might in fact be more efficient risk reduction. For firms that can navigate this territory sensitively, the benefits can be tangible.
 
If this is a theme that you are interested in, we encourage you to take a look at the agenda for AIMA’s Innovation Day, an all-day event taking place in London on 4 September 2024. Over the course of the day, we will shine a light on all aspects of how technology is impacting firms’ operations, including the growing role of RegTech. Join us to be a part of the conversation.  

To read more, and register
click here.

For more information contact
Adam Jacobs-Dean.