Troy Dixon: How Regulation Is Increasing Competition Among Hedge Funds

In the aftermath of 2008 and the implementation of the UA Dodd-Frank Act, the hedge fund landscape has been permanently altered. Now forced to abide by the rules and restrictions of the European AIFMD, larger hedge funds have had to give up some of their more effective tactics,

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Troy Dixon: How Regulation Is Increasing Competition Among Hedge Funds

In the aftermath of 2008 and the implementation of the UA Dodd-Frank Act, the hedge fund landscape has been permanently altered. Now forced to abide by the rules and restrictions of the European AIFMD, larger hedge funds have had to give up some of their more effective tactics,

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2 Big Reasons The Investing Playbook Is Outdated

Back in 1909, when radio was still in its infancy and steam ships were big news, the U.S. replaced Britain to become the economic leader of the century. The world’s financial headquarters were officially in New York, not London.

Globalization shifts power to the east

However, in the 21stCentury, especially during and after the Great Recession, we have experienced a shift in world economic power from west to east. The U.S. and Europe have clearly seen economic trouble and the center of power has moved further east to make cities like Beijing and Shanghai new global economic hubs.

The growth of technology and the acceleration of globalization has resulted in greater interconnection of global markets through a boost in communication and better awareness of the opportunities present in different corners of the globe.

This has led to both opportunities and challenges as division of labor enhances efficiency but competition grows. With access to global markets, everyday investors can tap into larger and more diverse markets. Using an unprecedented wealth of information, investors can effectively assess investments across a multinational portfolio.

Climate change matters to consumers

Climate change has also had an effect on how investors prepare for the future, calling on all companies to be more active in preserving the environment. Whether voluntarily or not, many companies have heard and responded to the call.

While climate change continues to make headlines across the world, a keen observer may notice that it has very little (if any) coverage in traditional investment books. The modern investor must take climate change into account when making investment decisions.

The Principles for Responsible Investment (PRI) released a guide to help investors reduce emissions in their portfolios. The paper, titled Developing an Asset Owner Climate Change Strategy, states thats, “Response to climate change must be tailored to an asset owner’s investment approach and asset class mix. This could involve: Measuring a portfolio carbon footprint; engaging with policy makers and companies on transitioning to a low carbon economy; and accelerating newer forms of investment.”

Where’s the good news for the modern investor?

When investing in the 21stCentury, there are two main things to keep in mind. One is that the investing playbook is very outdated because of the dramatic shift in financial power towards the east. If you’ve never looked into Asian stocks before today — now’s your big chance. Savvy investors can still seize opportunities that accompany global change and stride the wave of growth.

The energy market is also completely transforming, and the word “clean” has a lot to do with it. Where once we spent all our time and money on oil investments, everyone is now moving their money to alternative fuels that preserve and protect the environment. For the 21stcentury investor to succeed, they have to recognize the changing times, commodities, and technologies that surround them.

The second thing to keep in mind is that diversification remains the smartest way to go. If the financial crisis taught investors anything, it’s that keeping all your eggs in one basket is a terrible idea unless you’re prescient. By diversifying portfolios, investors hedge their bets against uncertain times of growth, and a cushion to protect them as they go through various unanticipated peaks and troughs.

It’s also worth pointing out that add that the days when an investor left everything in the hands of their financial manager are gone. The modern investor has to be proactive in managing their own funds — even if they are going to hand it off to someone else — and know all there is to know about their investments and the risk they carry.

Invest like it’s the 21st century

We’re already almost two decades into the 21st century, but we have to look even further ahead at the potential opportunities and challenges in years to come. We must reflect on past events and the opportunities we’ve already missed. Generally, the future looks very bright. But only if we’re willing to let go of some of our 20thCentury investment habits.

Originally published on

Why Is Golf An Elitist Sport?

Long referred to as “the gentleman’s game,” golf carries with it many upper-class connotations. The stereotypical golfer has too much time on their hands and too much money to care. While not completely true, there is a slight amount of accuracy to the idea that the world of golf is walled-off to many.

The game is almost synonymous with a certain kind of social and economic status. We popularly think of golfers as at least middle class, with plenty of leisure time and the means to afford expensive clubs, tee times, and frivolous accessories. The modern reality is that anyone can pick up the game of golf if given the right opportunity.

One major reason that golf is considered elitist is the perceived lack of diversity among those who play it. Golf history invokes ideas of exclusive country clubs with gates that open only for those with power, influence, and the right skin tone. Although today 20% of players are nonwhite with the proportion growing ever larger, the perception of golf remains that it’s mainly a sport for upper middle class white men.

Another reason for the elitist perception is that even playing on less expensive municipal courses requires access. They’re not places a group of teenagers can walk around the corner to start playing. At the very least they need a ride and borrowed clubs. Additionally, a golf course is a secluded piece of land that needs heavy regular maintenance. Not something you’re likely to find in underserved neighborhoods. This simple fact of the game means that many who lack transit options (most courses are not accessible by public transportation) will not have the opportunity to play.

Although the game itself is not inherently elitist, the fact also remains that golf is a hallmark of the business world, which is still mostly occupied by moneyed white men. We associate golf with the financially successful (or at least comfortable), and the course is a place where deals are made and professional relationships are formed. “A round of golf” is basically shorthand for a casual client meeting. To keep an entire generation of young people out of golf deprives them of a method of entrance into this world.

He may not be the role model he once was, but it’s easy to forget that at one point Tiger Woods carried on his shoulders the dreams of young people of all races. His success at an early age (he is still the youngest-ever winner of the Masters, earning his first green jacket at just 21 years old) was an inspiration for many not just to take up golf, but to strive for success in fields they may not have thought were intended for them.

It’s this sense of hope that The Bridge Golf Foundation nurtures in the young men we help. Through immersion in golf and related activities, we provide access to a world of possibilities both on and off the course. It’s not a matter of giving kids a new game to play. It’s about showing them that the world is full of opportunities to grow and learn in places they might have never considered before.

Originally published on

Private Equity Vs. Hedge Funds––The Implications of Investors’ Expectations

Private equity and hedge funds are both attractive options for high-net worth individuals, with many requiring a minimum of $250,000 in investments. However, while they have a couple of similarities, the two are fundamentally different types of funds.

Sometimes it’s unclear which of the two is the better option.

Let’s look at the key differences, as well as how the recession and recent legislation have affected both the immediate and long-term attractiveness of private equity and hedge funds as investment vehicles.

What’s the difference between private equity and hedge funds?

A private equity fund is a capital amount that an investor invests in a business with the aim of gaining equity ownership in the business. The funds are applied for different purposes, such as improving the balance sheet or ensuring smooth operations.

On the other hand, hedge funds (also referred to as investment partnerships) are focused on giving the investor an attractive investment vehicle that’s typically uncorrelated with the larger market. To achieve this, hedge funds typically specialize in a specific type of investment, usually in highly liquid assets all the way to esoteric illiquid securities. This allows the fund to gain a profit even in a bear market.

Unlike hedge funds, private equity is illiquid. Investors may not be able to recoup their money until a company has an exit.

Private equity funds are closely related to venture capital, and have similar long-term growth and exit goals. These kinds of investments are also uncorrelated with the market but are usually long-term, typically taking a minimum of 3–10 years before sale of assets. Accredited investors and institutional investors are most common to private equity, mostly because they best understand the implications and can afford to keep funds invested for long periods of time.

While both types of funds take measures to manage risk, hedge funds are usually more exposed to risk since they focus on short-term gains and mark to market. However, while a hedge fund manager can shield investors by anticipating profit levels basing on current conditions, private equity is highly speculative and investors often don’t know what their returns will look like until years later.

Private equity investment requires large capital commitments. Most private equity firms typically want investors who are willing to commit upwards of $25 million. Some firms have however dropped their minimum requirements to $250,000––which might still be out of reach for many average investors.

Hedge funds usually require a lower minimum of $100,000. But many hedge funds will require$1 million as the minimum investment––still nowhere near $25 million, though.

Both funds have a similar fee structure,  and typically require a management fee and a performance fee. The annual management fee for private equity firms is around 2% with a performance fee (or carried interest) of around 20% of the investment profits.

The “Two and Twenty” phrase is used in the hedge fund world to convey that hedge fund managers typically charge a 2% flat fee of the total value of assets and 20% performance fee on earned profits. However, in some cases, the 20% fee is charged only after the performance exceeds a certain threshold, which is typically around 7-8%.

What do investors expect from each type of firm?

Governments and regulators have reinforced the regulations of private equity firms, citing what was seen by many as over-favorable taxation. Investors have also pressured the industry to provide more transparency regarding fees and expenses. These new regulations will see investors deal with more transparent fund managers moving forward.

The current regulatory environment also presents a new set of challenges to hedge fund managers. Not only have they had to come to terms with the Dodd-Frank Act, they also have to comply with new registration and disclosure requirements. Investors are now more proactive in the selection and redemption criteria and are more likely to try and negotiate management fees as well.

In light of these new regulations, we can expect to see fund managers become more transparent and investors tighten -up their due diligence.

What’s the current outlook for private equity and for hedge funds?

In the past, private equity has maintained a track record of outperforming all other asset classes; this is generally has not been the case recently.  Recently, hedge fund returns have shrunk due to rising competition, market conditions, and regulation. Some critics argue that it’s unlikely hedge funds will return to their peak levels.

But things aren’t all bad. According to a McKinsey & Company post by Sacha Ghai, Conor Kehoe, and Gary Pinkus, “Industry performance is better than previously thought, but success is getting harder to repeat. Investors and firms will need to adapt to changing conditions.”



As institutional investors and high net worth individuals are expected to make bigger commitments in private equity, a study conducted by Barclays last year found that 48% of investors plan to make more allocations into hedge funds this year. This is an improvement compared to the 33% who voiced similar intentions in 2015.



The report goes on to say that while the asset level reached a new high last year, the industry also experienced outflows for the first time since the 2008 financial crisis. However, the report continues, there’s promise for net inflows in 2017.

Originally posted on

We Don’t Need Another Basketball Court in NYC

As a native New Yorker, a formerly middle-class African American, and professional in the finance industry, I often find that my opinions on various topics differs from that of my close friends and colleagues. The continued portrayal of African Americans in popular culture is one of those topics.

Growing up on basketball courts

I grew up in Hollis, Queens, a working-class neighborhood with working-class ambitions. The people around me used to say that when someone made it, they’d gone “from Hollis to Hollywood.” In many ways, despite the enormous strides African Americans have made since the 1960s, this remains the only option for most black youth—the path of entertainment.

Of course, this isn’t the only path for working-class black Americans. I would know, since that’s exactly where I started out, too. I used to play sports all day long. In fact, I was recruited to play football in college. But that wasn’t the path I stayed on, because I was shown other options.

What NYC looked like in the 60s and 70s

When I was a teenager, the city was a radically different place. New York City through the 80s wasn’t the kind of place people visited. Outside the skyscrapers and highrises, it was a city of abject poverty, drug addiction, poor education, and gang violence.

It was also my city, the only place I knew. It was where I grew up playing basketball and football. Although Hoop Dreams was shot in Chicago, the documentary is a close proxy for the experience of a young African American man growing up in an inner city community surrounded by overwhelming negativity.

Basketball court as sanctuary

One of the few places where I found solace was on the courts, playing pickup basketball with my friends. On TV, before rap and hip hop exploded onto the scene, all of our role models were ballplayers. All my friends wanted to be ballplayers. At one point, so did I. Getting recruited for football was one of my proudest achievements.

But, as I’m sure you already know, the odds of a teenager “going pro” from the inner city are next to nothing. The chance of a high school football player getting recruited for football at the college level and then getting picked for the NFL is .007% (about 1 in 14,000). High school basketball players have a slightly better chance of getting into the NBA at .01% (1 in 10,000).

When hoop dreams continue to be so dominant in the inner city, perhaps we shouldn’t be surprised that most middle-class black kids grow up to become poor black adults. Black Americans have a higher unemployment rate and a higher poverty rate. For comparison, white Americans have a poverty rate of 9.6 percent, while black Americans have a poverty rate of 27.2 percent. The gap between the wealth of white and black families is currently at its highest point since 1989.

Better, more realistic options for our children

The reality facing most black children today frustrates and disheartens me because I’ve seen the metaphorical light at the end of the tunnel with my own eyes. From what I see on a daily basis, most of the black kids in NYC continue to hold onto the same unrealistic hoop dreams I had decades ago as a child. This shouldn’t be the case.

Fortunately, there are plenty of programs in NYC and across the country for black youth who don’t realize they have options. That’s why I’m proud to support various youth empowerment programs across the country, including Boys Hope Girls Hope, the Bridge Golf Foundation, College of the Holy Cross, and the historic Apollo Theaterin Harlem.

At the end of the day, the future of children of color is whatever we make of it. It all comes down to what we reinvest into our communities ourselves. So if we don’t want our kids growing up with unrealistic dreams and want to guide them instead to useful, practical after school initiatives, we have to be the ones willing to take the leap and make those investments.

This article was originally published by at HuffPost

How Structured Products Secure the American Dream


It’s 9 years later, and we can still feel the impact of the 2008-2009 financial downturn. Many people blamed structured products for the crisis.  In reality, the real fault lies within loose underwriting standards and corporate greed. The lingering association, while no longer completely accurate in the here and now, is a large hurdle to overcome.

The reality is that structured products have changed. Rules and regulations have been set to mitigate the risk of the financial crisis, while the benefits (that always existed) are being rediscovered and repurposed.

Part of this shift comes from the increasing focus on providing investors with more transparency. Another part comes from being able to look at the crisis (and by extension, structured products) in hindsight.

Let’s take a look at the past, present, and future of structured products in America.

Structured products are still doing reputational damage control

Structured products are not flawless; there are valid concerns about liquidity band complexity. However, there are also many positive aspects to structured products that make them a viable offering.

Recently, there has been a shift in rules and regulations. Now, laws dictate that investors receive more clarity prior to making the investment, for example having access to the estimated value disclosures. The goal here is simple: put rules in place to help prevent another disaster.

Most institutions have realized that the best defense on the reputation of structured products is a good offense. They are helping their customers understand exactly what structured products are, how they work, and why, when used correctly, they add depth to an investor’s portfolio.

Also, they stress that structured products serve an even greater purpose. Everyday customers can benefit from structured products (like CDOs) that allow pooling of debt. In this way, structured products not only help investors, but also the general public.

Even still, structured products remain a mystery to most Americans. To get a better understanding, we have to separate fact from fiction.

How Structured Products Help Everyday Americans

Nowadays, many Americans have a visceral reaction to certain acronyms: ABS, MBS, CDO, CLO. Once upon a time, these never used to mean anything to people outside of the financial world

But it’s important to keep in mind that it’s not just banks that benefit from structured products. At the time of the crisis, for instance, Americans were leveraging the lower rates (much lower than they would have otherwise paid) offered by banks to take on the underlying loans, mortgages, and credit card debt.

Structured products work on the principle that the cash flow depends on the performance of underlying assets. By definition, a structured product is any product that derives its value from an underlying asset.

What does this mean? In essence, structured products are like traditional option pricing methods. They start to get complicated is when we start talking about derivatives. These include swaps, forwards and futures, and other embedded features like downside buffers and leveraged upside participation.

This works for both the financial institution and the customer. Thanks to structured packages, banks had the ability to package and sell consumer and homeowner debt, among other things.

The model of structured products makes the banks more willing to lend out money in the first place. Without structured products, consumers would likely face significantly higher rates or perhaps not be considered for loans and mortgages at all.

The world has certainly learned many lessons about the risks of structured products, and those risks shouldn’t be taken lightly. But we must not forget that “structured product” encapsulates a huge range of varying products. They can give an investor customized exposure to assets that they might otherwise not have been able to access.

The risks are also better understood and managed now. In 2008, when certain companies became insolvent, many investors were caught off guard. They weren’t aware of the risks because they didn’t have the necessary information upfront.

Financial Benefits for Investors

Following the financial crisis, investors have been very pessimistic about structured products, believing there’s not much in it for them. Negative media has only exacerbated the situation. However, structured products have proven that when placed in the right hands, they can optimize the investor’s portfolios in numerous ways.

Structured investments can help investors tap into markets or asset classes they’d have otherwise not been able to access. Because structured products have predefined returns, we’re able to participate in emerging or overseas markets while shielding from risks. The variety of choice also offers flexibility to diversify the portfolio.

By nature, structured products are able to offer some form of capital protection, depending on the anticipated amount of return. Investors are typically able to protect their initial investment from any market downsides while still being exposed to upside potential.

A great example to this would be Structured Notes, which allow investors to commit their money for a certain term. As long as they hold the product to term, they’re guaranteed to retrieve their principal investment, provided that no default occurs. In addition to the principal, they will carry any upside movement of the value of the underlying asset.

Following full disclosure of underlying risks, investors know the full scope of potential risks that come with a structured note even before they throw in any investment. Thus, they can be prepared in terms of wealth management and planning for tax cuts.

The Future of Structured Debt: A Safer, Stronger Comeback

Initially, securitization was part of the problem. But that doesn’t mean it can’t be or hasn’t been part of the solution. *For instance, the Federal National Mortgage Association (FNMA), which is a Mortgage-Backed Security (MBS) is currently valued at approximately $100.*

Several years later, we can look back at the financial crisis with fresh eyes. That also means being in a better place to analyze the benefits and drawbacks of structured products. Now, we have to be sure to take advantage of the benefits while buffering against the risks.

This blog was originally posted on

Using Storytelling as a Means to Mentor

14134388517_b65d0cae99_b-690x590“Show, don’t tell.” It’s one of the tropes used by high school English teachers across the country to explain to students that sharing a story full of specifics is more effective than simply stating facts. By the time we get out into the workforce, though, we’ve heard it so much that it doesn’t really mean anything to us anymore. As we work our way up to the top, we forget about the nuances of “showing” and start communicating in facts, numbers, and graphs–things we can grab onto.

Mentors could gain a lot by going back to basics and channeling their inner English teacher. While stating facts is often an effective way to sway someone who is undecided about an issue, it does little to inspire enthusiasm or ignite passion. For a better way to influence others, stay away from facts and stick to storytelling.

Learning from Modern Day Influencers

Some of the most successful influencers in our modern day society are storytellers at heart. Take President Obama, who rose to fame after his keynote at the 2004 Democratic National Convention. How did a relatively unknown Senator rise to stardom overnight? He stood at the podium and told his story–one that resonated with the entire world.

So did Martin Luther King, Jr. So did Nelson Mandela. So did most of our modern day “mentors of the masses.” Recently, TED talks have become known throughout the world for their “ideas worth spreading.” If you pay close attention, you’ll see that most of the talks start out with the speaker’s own story.

From the ancient Greeks to modern day politicians and business, storytelling is the element that makes the difference between connecting with an audience and falling flat. Bringing real life experiences to the table makes interactions believable, memorable, and worthwhile. Facts and statistics can peak our interest, but stories are what move us to action. The technique holds true for personal interactions in any form, from televised speeches to one-on-one conversations.

Stories Help Mentors Become Relatable

The most effective mentors aren’t the ones who are perfect. They’re the ones who are flawed, but who overcame those flaws in order to succeed. They’re the ones who weren’t natural superstars, but who worked hard and showed grit in the face of their troubles. Perfect people aren’t relatable. Vulnerable people are relatable. People who failed are relatable. People who aren’t afraid to stand up and own their weaknesses are relatable.

Everyone who has “made it” started somewhere. We’ve all had low points or setbacks or struggles. Instead of feeling like we should shy away from our personal hardships as mentors, we should instead share those aspects of our stories as widely as possible. A mentor is only credible if he or she can demonstrate that their success can feasibly be achieved by their mentees as well. The more we expose the specific realities of our struggles, the more mentees believe that maybe they, too, can succeed in spite of their challenges.

If This, Then That: The Formula of Effective Storytelling

The stories mentors share shouldn’t just be stories about hardship. They should be stories about triumph, and about what specific actions or qualities brought the protagonist success. The idea is to give mentees a repertoire of effective techniques to meet challenges.

Additionally, not all effective stories have to be about the mentor’s own experiences. Stories about famous historical figures or people personally known to the mentor can be just as useful at imparting lessons and driving home the point that the trouble the mentee is going through is something that others have been able to overcome as well, and to help generate ideas about possible ways to do so. Generic, canned advice will mean more if it is given in context of a time where it worked.

Know Your Audience

A good mentor works with each mentee as an individual, and adjusts their communication method accordingly to reflect how the mentee likes to receive information. Get to know your mentee, get to know how they think, and talk to them in a way that jives with their personality. Know when to tell a story, know when to give hard facts, and perhaps more importantly, know when to just listen. If you play your cards right, perhaps your mentee will provide you with yet another success story to share in the future.

Originally posted on

How to Use STEM to Empower Today’s Minority Youth


Though historically a leader in the fields of science, technology, engineering, and mathematics (STEM), the United States has fallen behind other industrialized countries in producing students who want to pursue a career in STEM-related fields. In 2014, the U.S. Department of Education reported that only 16 percent of high school students expressed an interest in a STEM career and had a demonstrated mathematical proficiency. Even though 28 percent of students expressed interest in working in a STEM-related field when they started high school, 57 percent of those students lost interest by the time they graduated.

Among minorities, the statistics are even starker. The 2015 STEM Index, sponsored partially by Raytheon, indicates a small growth in STEM-related education and employment between 2014 and 2015. However, gaps between whites and minorities remained the same or even widened. The data show that black, Hispanic, and Native American students earned fewer STEM-related college degrees, displayed lower test scores, and expressed less interest in STEM-related careers than their white counterparts.

The problem is not that the number of STEM degrees awarded among minorities is not rising. In fact, the number of STEM-related degrees earned by black students between 2000 and 2014 rose by 60 percent. However, the number of STEM degrees compared to the number of non-STEM degrees shrunk. The same proportionality issues are true for Hispanic students as well.

According to projections by the U.S. Bureau of Labor Statistics, between 2010 and 2020 job growth in STEM fields is expected to grow by 18.7 percent compared to 14.3 percent for all other occupations except healthcare. Moreover, an increasing number of non-STEM careers, including the manufacturing sector, require workers with STEM-related skills. Therefore, increasing today’s minority youth’s interest in STEM will help empower them to pursue a wide range of careers in a number of growing fields.

The STEM curriculum was developed to do just that. Its approach is to teach the four STEM subjects in an applied, interdisciplinary manner. Rather than learning the four subjects as separate and discrete entities, students learn from a cohesive program that teaches them how to combine the individual disciplines and use them in real-world applications. Since 2009, the Obama administration has increasingly emphasized and funded STEM curricula throughout the country. By 2015, over $1 billion had been raised for STEM programs. Nevertheless, the National Science Foundation reports that fewer financial resources are available to schools that serve lower-income and minority students. They also employ fewer teachers who are specially trained in math and science.

One way to combat these deficiencies is to increase funding for afterschool-based STEM-related clubs and activities. Research shows that quality programs increase students’ likelihood of graduating and pursuing a STEM-related career. While legislators have petitioned for federal funding to assist with this goal, the private sector has also been working to make it happen.

The Games 4 Learning Institute (G4LI), based at New York University, works with Microsoft to teach STEM skills to minority youths through something many youths love: video games. Underneath the fun of video games are engines that simulate complex real-world systems. Teaching young learners how to program and develop games helps bolster their inquiry, analogical reasoning, and problem-solving skills.

Other private sector companies and institutions are following suit. Baxter, an Illinois-based global healthcare company, partnered with Northwestern University’s Office of STEM Education Partnerships to create the Biotechnology Center of Excellence at Lindblom Math & Science Academy, a Chicago public school with a predominantly minority and low-income student body. Between 2012 and 2014, the center trained 168 teachers from 115 schools on how to administer STEM education. These teachers went on to reach 20,000 students.

The State of Illinois also engaged in nine statewide public-private partnerships called STEM Learning Exchanges to partner students with private sector mentors who guide them through independent research. The connections are made through a website called the Mentor Matching Engine, described as a “STEM,” that allows students from rural areas to have the same access to mentorship as their urban counterparts.

Finally, Motorola Mobility, Siemens, and IBM are among a larger group of private companies that partnered with the MacArthur Foundation and the National Science Foundation to create FUSE, an out-of-school initiative designed to engage minority students in robotics, electronics, mobile app development, and 3D design. The program encourages interest and learning by presenting learners with increasingly difficult challenges for them to solve.

This blog was originally posted on Troy Dixon’s philanthropy blog.

Troy Dixon on How Regulation Increases Competition Among Hedge Funds

In the aftermath of 2008 and the implementation of the UA Dodd-Frank Act, the hedge fund landscape has been permanently altered. Now forced to abide by the rules and restrictions of the European AIFMD, larger hedge funds have had to give up some of their more effective tactics, like using leverage as a tool to eclipse their competition.

These dramatic actions have resulted in a leveling of the playing field. This opportunity has given rise to new players in the game, and, as such, increased the competition in this new, more fair hedge fund space.

What does this increased competition look like, and what does this mean for the hedge funds of today?

Smaller hedge funds making headway

In wake of stricter regulations, a growing trend has emerged: prime brokerages opting for smaller hedge funds.

While not always the case, smaller hedge funds have distinct advantages over their larger competitors. While the larger players possess mightier resources and sizeable teams, these resources can act as a double-edged sword, ultimately proving cumbersome in some cases.

A smaller hedge fund has the ability to operate within a single regulatory framework, dealing unilaterally with both risk and reporting environments.In short, this equates to having a more holistic understanding within a smaller team, thus providing the opportunity to be more agile and reactionary.

An increased focus on technology

As hedge funds attempt to juggle multiple service providers, analytics and processes become much more tortuous. Technology allows the operations side to manage resources more effectively and tackle the complicated problems that arise with managing multiple accounts. This allows the large hedge to be effective across their entire client base.

But technology is also a major expenditure. KPMG recently found that nearly 40 percent of hedge funds plan to invest over one million dollars annually in technology for the next five years. That accumulates to a spending boost of around 35 percent.

In some cases (especially with larger hedge funds), technological fees account for nearly a quarter of the overall management fee. This makes sense when considering the overall framework: over half of the staff in larger hedge funds aren’t involved in asset growth, they’re focused on tech and data management.

Branching payment structures

Originally, there were only two options when it came to hedge funds. One option was to work with an intermediary of a large bank, which meant ultimately having to pay both the prime broker and the intermediary. The other was to go with one of the big names in the industry and incur the massive fees associated with their expertise.

Now, increased regulation has allowed smaller hedge funds to see more action. This has allowed them to change up their payment structures in order to win accounts. One strategy some have used to eliminate the markup on the intermediary by cutting them out altogether. In doing so, their rates can be more dynamic. It also allows smaller hedge funds to operate on a case-by-case basis, giving them a more docile framework of payment structures.

More customized strategies


As smaller hedge funds become a more viable choice in this post-recession world, they’ve taken great lengths to diversify their strategies. They can custom tailor it to their clients in a way the larger, more established funds might not be nimble enough to operate.

And it’s having dramatic results on the output. A recent study showed a significant discrepancy between the output produced between large and small funds. While the brand name agencies (unsurprisingly) brought in a significantly larger quantity of money, in terms of returns, they only hit a return percentage of 7.32, whereas the smaller portfolios earned an impressive 9 percent.

Obviously, these are overall figures and can’t paint an accurate picture of what each individual hedge fund is capable of. However, it does show that, coupled with the boost in technological spending and the diversification of options existing within the hedge fund space, that seismic shifts are happening in this very dynamic market.

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