www.hedgeweek.com special report A Global Fund Media Publication | February 2019 US Hedge Fund Services 2019 Active intelligence Increased volatility AI & robotics for cloud security should favour drive greater US stock pickers efficiency KEY STEPS TO SUCCESS Managing a Start-up or Emerging Hedge Fund in 2019 WEDNESDAY 29 MAY 2019 THE UNIVERSITY CLUB, NEW YORK Hosted by Contact: [email protected] www.globalfundmedia.com GFM-US-HF-Event AD 2019.indd 1 29/01/2019 11:38 CONTENTS In this issue… 04 Higher volatility should favour specialist stock pickers By James Williams, Hedgeweek 11 Time for active managers to prove their worth Interview with Jack Seibald, Cowen Prime Services 14 Standardising digital communication for fund data Interview with Joanna Babelek, HedgePole 17 Applying active intelligence to cloud security Interview with Jed Gardner, Linedata 20 Hedge funds to regain their shine in 2019 Q&A with Frank Napolitani & Jaclyn Greco, EisnerAmper 23 Using AI to better visualise complex data Interview with Mike Megaw, SS&C GlobeOp 25 Make your cloud environment a fortress By Mary Beth Hamilton, Eze Castle Integration 28 Robotics migrates into the desktop Interview with Christine Waldron, U.S. Bank Global Fund Services 30 Standardising the fund administration industry Interview with Robin Bedford, Opus Fund Services 32 Residency of independent directors more important in current market Q&A with Karl O’Reilly, IMS Publisher Published by: Global Fund Media Ltd, 8 St James’s Square, London SW1Y 4JU, UK www.globalfundmedia.com ©Copyright 2019 Global Fund Media Ltd. 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US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 3 OVERVIEW Higher volatility should favour specialist stock pickers By James Williams, Editor in Chief, Hedgeweek The market correction that ripped through Q4 macro factors and was, in many respects, 2018 was perhaps a pre-cursor for increased a necessary event to release valuation volatility this year, and if that is the case, pressure that has been building in US equity active fund managers – especially specialist markets in one of the longest bull market sector-focused stock pickers and short rallies since the Second World War. specialists – could make substantial gains for The question for investors in 2019 is their investors. whether hedge funds can step up and The volatility index (VIX), which some like deliver sustained alpha in a higher volatility to call the ‘fear and greed’ index, spiked environment. above 36 on Christmas Eve while the Some of the most famous managers Dow Jones crashed below 23,000 on 20th continued to shine such as Ray Dalio’s December: a 4,000 point decline from its Bridgewater, whose flagship Pure Alpha October peak. strategy generated 14.6 per cent net of fees, This shake-up was largely driven by as reported by CNBC. D.E. Shaw produced US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 4 OVERVIEW similar returns for its Composite Fund, “I do think it’s a good time for returning 11.2 per cent in the year, while another titan of the industry, Renaissance hedge funds. The small and Technologies, saw its RIDGE Fund generate mid-sized space looks really returns north of 10 per cent. attractive. We are allocating These managers are the apex predators, accessible to only the largest institutional to a number of strategies investors and as such represent a tiny including equity long/short, percentage of the overall industry. Not that they all did well. Some funds, event-driven and global macro such as Dan Loeb’s activist-focused Third and I’m positive on 2019.” Point had a challenging year, reportedly Kieran Cavanna, Old Farm Partners down 6 per cent in December alone, according to CNBC. The influence of passive investments, could be another couple of months before whose popularity has skyrocketed since we see those redemptions being met.” the Global Financial Crisis, has created real Kieran Cavanna is the co-founder of Old problems for hedge funds. Those who trade Farm Partners, a New York-based FoHF the markets based on deep fundamental manager that focuses specifically on small research were swept into the vortex in Q4 as and mid-sized managers. Cavanna previously ETFs and other passive products recorded managed the hedge fund selection team at losses. Hedge funds who operate perfectly Soros Fund Management. sound trading strategies designed to He says that while no one can ever know generate uncorrelated returns could not help how the markets will perform, “I do think but be buffeted by index moves. it’s a good time for hedge funds. The small As CNN reported, the S&P 500 was up and mid-sized space looks really attractive. or down more than 1 per cent nine times We are allocating to a number of strategies in December and 64 times for the calendar including equity long/short, event-driven and year. “In all of 2017, that happened only eight global macro and I’m positive on 2019. times,” it reported. “You saw big dislocations in Q4 but risk Hopefully, what this shake-up will do is assets have ripped back up in the last few bring markets back to earth and operate weeks; biotech as a sector is up 11 or 12 per on fundamental principles, rather than be cent alone. Things are more volatile, it could artificially inflated by years of central bank go either way, but I think a lot of managers intervention. who are geared towards volatility and thrive, If it does, this could augur well for come what may, could do very well this specialist hedge funds who operate in the year,” says Cavanna. middle-markets, away from the titans referred In his view, the markets have gotten to above, and allow them to demonstrate distorted because of the market cap- why, in more challenging markets – rather weighting of all the money that has gone in than a one-stop bull market rally – hedge to passive funds and index products. funds can deliver good risk-adjusted returns, “I can’t say whether that will persist or that passive investments simply cannot. end but I do think the flood of passive “Some of the new managers we were money has slowed and many distortions working with in Q4 have now either launched that have been built up could unwind to or are preparing to launch,” comments Jack some degree… I’m not hearing the whole Seibald, Global Co-Head of Cowen Prime ‘Well, I can just buy the S&P 500 for 5 basis Brokerage and Outsourced Trading. “I think points’ argument from investors at all any we will see more funds close this year that more. Nobody knows whether we will enter have long outlasted the patience of their a recession in 2019, how much further bond investors. The downdraft didn’t happen until yields might tighten. I do think selective deep into the fourth quarter. Many funds allocations to specialist active stock pickers have 90-day redemption periods so even if could be on investors’ minds this year,” redemption notices were filed at year-end it he says. US HEDGE FUND SERVICES Hedgeweek Special Report Feb 2019 www.hedgeweek.com | 5 OVERVIEW Seibald notes that the drops in market “A good 80 to 90 per cent values in December were both “precipitous and sustained”. “Yet in the first four or of hedge fund managers five trading days of January, some of our today probably haven’t seen managers were up substantially: a few as a bear market. We’ve been much as 20 per cent. The selling pressure abated and stocks found their footing again,” in a bull market for the past says Seibald. eight years or more. It is “The question is, do investors judge hedge fund managers on interim results a time to be more nimble or the realised value of the investments and thoughtful around they’ve made? It’s the USD64,000 question. trading than it is to be a How patient is the hedge fund allocator community going to be? I saw funds down steadfast investor.” 10, 15 per cent in December alone and John Rende, Copernicus Capital they’ve nearly recovered those losses in Management January. They haven’t reached their high watermarks of three months ago, but they’ve haven’t seen a bear market. We’ve been certainly regained a good percentage of the in a bull market for the past eight years or drawdowns we saw in December.” more. It is a time to be more nimble and Much of the volatility in Q4 was macro- thoughtful around trading than it is to be a driven and linked primarily to fears of what steadfast investor.” the US Federal Reserve would do regarding This nimbleness and dexterity could interest rates and the impact that Chinese benefit smaller hedge funds more than their tariffs could have on the US market. larger, billion dollar peers who do not have “When you have a correction that the capacity to trade opportunistically as aggressive, in terms of the speed and doing so would be too big a signal to others, magnitude of volatility, correlations go up,” causing the markets to move against them.