The traditional hedge fund model is no longer working. Performance is poor. Costs are high. Alignment is low. It needs to change. The three forces driving this need for change are:
- Increasing costs as regulators and investors demand higher operational standards
- Pressure on fees as investors are become more sophisticated and expect more for less
- Greater competition making the markets more efficient and fragmenting available alph
The situation is problematic
Only the big hedge funds have the economies of scale to survive. We see that the majority of funds are flowing to the biggest managers on the back of extensive marketing and distribution. Unfortunately, their size makes it very challenging to deliver real alpha.
Smaller hedge funds have tended to outperform larger hedge funds – they are agile enough to find and capture the increasingly fragmented pockets of alpha. However, the economics don’t work for them and investors don’t seem to want to invest in them. It doesn’t make sense to have a whole lot of sub-scale, stand-alone hedge funds any more.
Open platform fund
Instead, we are building a platform business where we partner with many of these smaller hedge fund managers (as well as independent systematic traders) to help them grow. It is a new model. We receive signals from our partners, dynamically allocate capital and then trade these strategies. These partners in turn receive a share of the profits and can grow their capital through performance. Investors get exposure to a dynamic portfolio of great systematic trading strategies, while benefiting from robust risk control at low cost.
The future
We see the future as a network of alpha specialists with deep domain knowledge and good technical capabilities. The network is linked to a platform that offers economies of scale and scope in execution and risk management. The platform can offer products customized to investors’ risk preferences and constraints at low cost and on-the-fly.
If you would like to know more, please get in contact at info@noviscient.com
