Hedge funds and private equity groups are on a “treadmill to oblivion” unless they embrace technology such as blockchain and artificial intelligence more quickly, according to a report by KPMG and consultancy Create-Research.
It says large profit margins and a reliance on personal relationships for doing business are preventing many groups from digitising fast enough.
“If they don’t do anything they’re going to be the unwitting victims of the revolution that is going to sweep through their industry,” says Amin Rajan, chief executive of Create-Research. With profit margins of about 40 per cent, “there’s no incentive to embark on major steps”, he says.
Barriers to digitisation also include cost and complexity, according to the report, which surveyed 125 companies with $2.6tn of assets under management.
The report cites concerns including cyber security and the difficulty of transforming legacy IT systems, and managers preoccupied with regulatory change and making returns amid low interest rates.
Factors distinctive to alternative asset managers include their high profit margins, emphasis on personal relationships and the bespoke nature of dealmaking by private equity groups. It says these are barriers to embracing automation and machine learning.
More than 60 per cent of those interviewed think digital developments will force significant change in the next decade and are anticipating job losses. Only 2 per cent of interviewees anticipate no change.
Hedge funds and private equity groups disagreed with the verdict that the industry is innovation-shy, pointing out that machine-learning algorithms have been used by hedge funds for decades.
“With respect, we disagree with this analysis. Private equity is flying below the radar on this one,” says Tim Hames, director-general of the British Private Equity and Venture Capital Association.
Jon Moulton, the UK private equity veteran and founder of Better Capital, says the picture painted by the report does not ring true. “There’s not a lot that could be done that is not being done,” he says in reference to private equity, adding that parts of the hedge fund industry “are incredibly automated”.
The quantitative hedge fund industry is set to surpass $1tn of assets under management this year amid surging interest in investment funds that use computer-powered investment strategies.
Mr Rajan argues that the biggest names are “iconic standouts” rather than being representative of progress in the industry as a whole.
He says many groups want to watch others experiment before investing themselves but predicts that the bigger players, which have the funds to implement new technology, will scoop up a greater share of assets.
“They are thinking seriously enough [but] it’s a question of converting interest into action.”