5 Ways FinTech Will Change the Hedge Fund Industry

FinTech innovations are impacting many verticals of the financial services industry. This includes the hedge fund industry, which may look very different in the years to come.

Whilst the focus in the media is often about artificial intelligence and machine learning replacing human hedge fund managers in managing portfolios, many other FinTech innovations may have a quicker and more direct impact on the broader hedge fund ecosystem and its traditional dynamics. 

Here are five examples of such FinTech innovations that may change the industry.

1.     The Uber or Crowdfunding of Portfolio Managers?

Getting good trade ideas is what many hedge fund managers ask from their brokers. Imagine crowdsourcing such tasks? Why not allow anyone anywhere in the world who believes he or she can outperform the market to submit his or her trade ideas instead of being limited by your small team or the sell-side brokers you speak with?

This is already happening very successfully in the quant space, with Quantopian being a great example (Point72’s Steven Cohen just invested US$250 million). The platform provides the data, the research and free backtesting capabilities. Anyone in the world can submit his or her algorithms, be allocated the platform’s capital and take a cut of the profits while maintaining the intellectual property. The result? Lots of potential financial upside for the portfolio manager while being very asset light for the platform, with no need to worry about headcount, providing benefits or big egos.

2.     The Spotify of Investment Research?

Hedge funds will often trade with certain investment banks to get access to their research even if they care about the research of only a handful of analysts. This is like buying a CD when you like only one or two songs. Also, such analysts’ compensation is often based on surveys, client votes or broker reviews – methodologies that have not evolved in years and which are sometimes strange considering the technology available today.

The good news is that research analysts can now increasingly start operating as freelancers who are not tied to a particular broker but are, rather, focused on putting their research on independent FinTech platforms. Clients can subscribe or pick and choose the research and analyst they are interested in, somewhat similar to how Spotify works for music. The analysts then get paid based on the number of views they generate. Regulations such as MiFid 2 in Europe also act as catalysts for such a change as they push towards the unbundling of research and execution services. Smartkarma is a good example of such a FinTech start-up.

3.     Virtual Capital Introduction Conferences?

The capital-raising process for any hedge fund manager is not only time-consuming but also often inefficient as it is conducted via intermediaries such as placement agents or prime brokers’ capital introduction teams. The process is very high touch, costly and inefficient, and it is not uncommon to see a 12–24-month period from initial introduction to investment, if any.

Numerous online FinTech platforms are popping up that not only connect hedge fund managers and investors but also allow an investor to do an initial screening, see a video of the fund manager online and obtain key due diligence information. This not only accelerates the process and reduces the cost of raising capital but also allows investors to find fund managers directly without relying on intermediaries. Recent regulatory developments – AIFMD in Europe, for example – that have limited the ability of hedge fund managers to go and actively raise capital, are acting like catalysts for such offerings. Fundbase is a good example of such a firm.

4.     Collaboration Is the New Idea Generation?

Hedge funds have historically tended to be secretive. But imagine instead sharing your original research with other buy-side participants. And in turn, being able to access their original ideas and get original research from other smart investment professionals. Could 1 + 1 = 3?

Many platforms are popping up that are based on reciprocity, where members are required to share certain pieces of information in order to be able to access the intellectual work of thousands of others. It’s similar to working in a hedge fund with tens of thousands of analysts and portfolio managers around the world. In addition to accessing differentiated investment research, such platforms further enable portfolio managers to build a track record, which can be useful when launching your own fund... SumZero is a good example of such a platform.

5.     Big Data Providing True Market Sentiment?

Hedge fund managers are used to receiving calls from their brokers providing them with market colour. However, such information is inherently limited to what that broker was able to read that day or to whom he or she was able to speak with. While some hedge funds have been using cutting-edge big data and artificial intelligence machine learning tools for many years (think Renaissance Capital or Two Sigma, for example), such tools are now becoming mainstream and widely available.

FinTech start-ups now offer hedge fund managers the ability to not only get the market sentiment across hundreds of media outlets globally but also across social media networks such as Twitter – which these days can predict market moves – thus empowering a fund manager to understand the market sentiment and assist in the decision-making process. Amareos is a good example of a FinTech start-up in this field.

***Please note that out of respect for professionalism and impartiality, the author is not an investor, not an advisor and has no affiliation with any of the FinTech start-ups mentioned in this article.***

Henri Arslanian

About the Author:

Henri Arslanian is an Adjunct Associate Professor at Hong Kong University, where he teaches graduate courses on Entrepreneurship in Finance as well as the first FinTech course in Asia. His latest book titled “Entrepreneurship in Finance: Successfully Launching and Managing a Hedge Fund in Asia” will be published in late 2016 by Palgrave Macmillan.

A member of the Milken Institute’s Young Leaders Circle and with over 50,000 LinkedIn followers, Henri is a regular speaker globally on the topic of FinTech and hedge funds to various audiences, ranging from TEDx to Fortune 500 management teams. He currently sits on a number of other finance, academic, civil society and FinTech-related boards and advisory boards. Henri was recently with a FinTech start-up and previously spent many years with UBS Investment Bank’s prime brokerage team in Hong Kong. He started his career as a financial markets and funds lawyer in Canada and Hong Kong.

For media inquiries or speaking engagement requests, please contact [email protected] or visit www.henriarslanian.com

Other related articles from the author include:

• Hong Kong's FinTech 'Sandbox': 10 Things You Need to Know
• 10 FinTech Predictions for Asia in 2016
• 5 Takeaways from the 2016 Milken Institute Global Conference
• Why We Need to Teach FinTech to Finance Students