Market Outlook: Hedge Funds 2017Transformation Through Technology

1The current landscape

Summary

Why are funds changing?

• Many hedge funds have closed their doors, but negative selection has left the industry stronger. Inflows are growing and low rates are leaving investors keen to find outsized returns.

What will change?

• Things are tough all over, but high barriers to entry and reduced prime broker recommendations are driving a flight to quality new funds.

• Hedge fund managers have to focus on performance.

4

Imagine: Freedom to Invest

Fund managers want to grow AUM, but challenging market conditions are leading to underperformance or closure.

Intensifying competition and transparency demands are increasing pressure to perform.

To beat the fee pressure as investors push on fees, funds must scale and boost efficiency.

5

Signs of a Turning Tide

• Global AUM tops $3 trillion* for the first time and is expected to reach $4.6 trillion to $5 trillion** by 2020.

• Despite heavy redemptions in 2016, the hedge fund industry grew in terms of net assets under management by 0.73 percent.*

• For the full year 2016 (FY16), total hedge fund industry capital increased by $121 billion, the largest annual increase since 2014.*

• Investors paying for performance, not for management, where fees are now 1.75 percent, typically down from 2 percent.***

Sources: *HFR®, **PWC and AIMA, *** Aranca and FIS research

6

The Industry’s Beliefs

• Fee structures will impact fund profitability based on performance/asset growth.

• Regulation is hampering investment strategies.

• Demographic shifts will change the way hedge funds attract new business.

• Investors see disruptive, innovative strategies as enablers of growth.

• Hedge funds must improve their technology to support growth and client relationships.

Source: Aranca and FIS, Growth 2020: The Changing Chemistry Between Hedge Funds and Investors.

7

To take advantage of the new environment, firms need to:

Take Control

Innovate in product

Optimize their operations

Unify their insights

Strengthen their decision making

Regional focus

2

9

Mature and crowded, its 11,183 funds work hard to differentiate.

North America

• Regulations such as the Foreign Account Tax Compliance Act (FATCA) impact all functions.

• Deregulation via the loosening of Dodd-Frank may be affected under the Trump presidency.

• Basel III created additional capital, liquidity, and leverage constraints for prime brokers.

• There’s an opportunity to stand out.

10

Strongly regulated, Europe’s 10,699 funds need operational support.

Europe

• Regulations compel resources and detract from new strategies and products.

• The Markets in Financial Instruments Directive (MiFID II) is cited by European respondents as most disruptive.*

• KPMG predicts continued investment in technology to improve a wide range of activities.

• The region needs a drive for efficiency.

* Aranca and FIS, Growth 2020: The Changing Chemistry Between Hedge Funds and Investors.

11

The 3,792 Asian funds, largely focused in Hong Kong and Singapore, have mixed fortunes.

Asia Pacific

• Chinese hedge funds were booming in 2016 as the country has largest institutional investment base.*

• Johnson report recommended an Asia Region Funds Passport with concessions exemptions for foreign investors.

• Estimates say the passport, which is expected to be operational by the end of 2017, will create 170,000 jobs and save investors $20 billion per annum.**

• The doors are opening.

* Chartered Alternative Investment Analyst Association, ** Asia-Pacific Economic Cooperation

12

If You Were to Make One Right Move …

• Highly regulated funds in Europe and potential deregulation in the U.S. both bring heightened operational pressures.– Gain massive advantages from automation and digitalization.

• Funds can see operational boosts from risk management as a service and portfolio optimization. – Strengthen your infrastructure in the front, middle and back office.

• You can consolidate operational support with a single service provider.– Support rigor, reduce expense and focus on growth.

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