Tackling Rising Costs, Cybersecurity Risks, and the Talent Shortage

The hedge fund industry has changed dramatically since 2018, yet many of the core challenges identified back then—compressed margins, rising regulatory demands, and fierce competition—continue to define the landscape. The ongoing question for small-to-mid-sized firms remains: how can they not only survive but thrive? To address this, we revisit the insights shared during FundCount’s roundtable discussion at the HFM Boston Operational Leaders Summit and update the conversation with today’s realities.

The Tech Dilemma: Beyond Simple Integration

At the 2018 summit, the focus was on operational efficiency through the integration of disparate systems and data normalization. Fast forward to 2024, and the pressure to streamline operations has intensified. Regulatory demands have become more stringent, and the complexity of data continues to grow. However, the technology itself has also evolved.

Now, hedge funds are no longer just concerned with data normalization. They must grapple with advanced AI-driven analytics, machine learning algorithms for risk management, and the increasing need for real-time data aggregation across global markets. While larger firms have the resources to implement these technologies seamlessly, small-to-mid-sized players must be more strategic. The move toward cloud-based infrastructure, once seen as a luxury, has become essential for firms looking to reduce IT costs while maintaining operational flexibility.

Data Control and Security in a Cyberthreat-Driven World

Back in 2018, data security was a key concern. In 2024, the stakes are even higher. Cybersecurity is no longer just about securing data—it’s about safeguarding the entire business operation. Cyberattacks have become more sophisticated, and hedge funds are increasingly becoming targets due to the sensitive information they handle. According to a 2023 survey, nearly 60% of hedge funds experienced a significant cyber incident in the past 12 months.

For small-to-mid-sized firms, investing in a robust cybersecurity framework is no longer optional. The trend towards third-party cloud services and managed security solutions has grown, enabling firms to outsource their cybersecurity needs while ensuring compliance with regulations such as the SEC’s new cybersecurity disclosure rules. However, the challenge remains balancing the cost of these investments with maintaining profitability.

Fund Expenses: Reevaluating Shadow Accounting

The debate surrounding shadow accounting, a hot topic at the 2018 summit, remains central in 2024. Back then, the cost of full shadow book accounting was seen as prohibitive for many firms, leading to a trend towards partial shadowing. Today, the conversation has shifted slightly. While shadow accounting is still viewed as essential for firms catering to institutional clients, advances in technology—particularly automated reconciliation and real-time reporting tools—have enabled firms to reduce the manual labor traditionally associated with shadow accounting.

The question for hedge fund managers is no longer “to shadow or not to shadow,” but rather how to optimize shadow accounting in a cost-effective manner. Tools that integrate directly with fund administrators’ systems, reducing redundancies while maintaining oversight, have become more common. This hybrid approach allows firms to reduce operational costs without compromising control over high-risk operations like illiquid asset valuation or fee calculations.

Staffing in a Competitive Market

The challenge of finding skilled personnel remains a constant since 2018. In fact, it has arguably become more difficult as hedge funds compete with tech companies for top data scientists, AI specialists, and cybersecurity experts. Compounding this is the shift towards remote work, which, while offering flexibility, has created new competition in the global talent market.

For small-to-mid-sized firms, attracting and retaining talent often hinges on offering more than just a competitive salary. A focus on culture, career development, and the opportunity to work with cutting-edge technology has become increasingly important. Firms that can position themselves as innovators, even without the massive budgets of larger competitors, stand a better chance of securing the talent they need.

Technology as a Differentiator

The 2018 discussions highlighted skepticism toward technology investments beyond what was required for fund administration. Today, however, the narrative has shifted. Technology is not just a tool for back-office efficiency; it’s a competitive differentiator. Hedge funds that invest in advanced analytics, AI-driven trading strategies, and seamless operational platforms are better positioned to meet the demands of institutional investors.

That said, small-to-mid-sized firms face the challenge of determining which technology investments offer the highest return. The industry has seen a rise in modular solutions—platforms that allow firms to select and implement only the tools they need rather than investing in expensive, all-in-one systems. This approach can help smaller firms compete without breaking the bank.

Strategic Choices for 2024 and Beyond

As hedge funds continue to navigate an increasingly complex environment, the lessons from 2018 remain relevant, albeit with new nuances. Small-to-mid-sized firms can thrive by making strategic technology investments, tightening their cybersecurity protocols, optimizing fund administration processes, and focusing on talent acquisition and retention.

The key takeaway for 2024? Success lies in adaptability. Firms that embrace technology not just for operational efficiency but as a core part of their strategy will be better positioned to tackle the challenges ahead and seize new opportunities in the ever-evolving hedge fund ecosystem.