Evolution of data management within hedge funds

By Sarah Monaghan

Despite the global disruption that the pandemic wreaked, assets under management for the hedge fund industry are breaking new records.

Ahead is likely to be the acceleration of digital transformation trends as the industry becomes more automated in line with the COVID-19 economic recovery. Market volatility is forcing hedge fund managers to take a long hard look at their data management resiliency.

The pandemic has shone a harsh light on the need today for high-quality data and the systems in place that deliver and store it.

But these challenging times have brought an up side. They are proving to be a catalyst for change and innovation.

There is a growing use of big data to source and mine new sources of alpha generating ideas and to measure investor sentiment that can direct asset prices.

Fund managers are increasingly applying AI and ML to improve their operational efficiencies, boost returns and gain a competitive edge in the market.

Data access and data centricity are key to matching infrastructure to ambition. With data powering more and more business decisions, information is both a fuel and a valuable currency for firms overseeing portfolios and originating deals.

Today's growing focus on data management is also being driven by the investor- and regulator-driven demand for greater transparency and risk awareness.

Hedge fund managers face an abundance of new challenges of additional reporting and record-keeping requirements, not least through MiFID II and MiFIR, which have imposed implications that include changes in client categorisation and best execution rules.

Robust data management – using data warehousing technology that takes data from multiple diverse sources and places them inside a central repository – is the answer.

Cloud adoption, hand in hand, is driving success in this new era of transparency to comply with increasing regulations and operational risk.

It makes it possible for all dots to be joined for compliance purposes across diverse, disconnected and siloed internal regulatory systems.

Management of key data sets – by storing and managing them consistently – is now an operational priority for many and the answer to leveraging hedge funds’ three essentials: data, technology and people.

So who is doing it best? And how? These are the companies to watch:

1. Renaissance Technologies (Medallion fund)

With 66% average annual returns since 1988 – 39% after fees – Renaissance's Medallion fund is in a league of its own. Its advantage? It employs a ‘quant’ strategy, trading largely on data and mathematical relationships rather than fundamentals.

2. Bridgewater Associates

Founded by Ray Dalio, Bridgewater Associates is the biggest hedge fund in the world, managing about $150 billion in investor money. Its advantage? The firm prizes "radical transparency".

3. Pershing Square

Run by Bill Ackman, a Wall Street billionaire, it saw a 70.2% return in 2020. Its advantage? This is a highly concentrated fund, with only seven stocks.

4. Jana Partners

Run by Barry Rosenstein, the fund returned 17.5% annually through the end of 2019, the most recent year for which there's reporting on its performance. Its advantage? It claims to ignore the crowd and typically focuses on value stocks.

5. Tiger Global Management

Tiger Global was the single best performer among large hedge funds between 2016 and mid-2019, returning 22.4% annually. Its advantage? Its high capitalization means it has the ability to finance hot companies that aren't yet public.