How automation is giving hedge funds a crucial competitive edge

This week I have been musing over the importance of automation in the hedge fund sector, and the different degrees to which firms can automate processes to give them a competitive edge.

At one end of extreme spectrum, a financial start-up called Lending Robot is an automated hedge fund which will invest exclusively in loans originated on peer to peer lending platforms, and will use algorithms to automatically buy and sell assets on behalf of its clients, negating the need for human investors. Lending Robot claims that it will offer greater transparency on investments by utilizing blockchain technology, and that its low overheads will mean it can charge lower fees than traditional hedge funds. This is a business built from the ground up on automation, and it will be interesting to see how it pans out.

Another extreme case, Bridgewater Associates, the world’s largest hedge fund, is developing a bespoke software solution which will automate the day to day management functions of the firm, including functions of HR, operations and management decision making. This automated decision making will run according to the vision of the founder, Ray Dalio, and will be based on a set of rules and criteria which take into account data from different sources to make decisions.

An example of the artificial intelligence that is already in place at Bridgewater Associates, is a scoring system whereby employees are asked to grade each other throughout the day. These marks are then compiled into score cards which identify employees’ strengths and weaknesses. A useful tool when allocating resource and promoting or otherwise. Another HR related piece of software asks employees to set their own goals and then it tracks how effectively they set about meeting these. The vision for the business is that intelligent software will make around 75% of all management decisions.

Whilst the extensive use of automation at Bridgewater Associates is extreme, there are many business processes which would benefit from automation, and where firms could save valuable time by introducing intelligent software.

Across the industry, many hedge funds still manually open investor accounts, process subscriptions and redemptions and organizations like GAIA are working hard to allow these to be automated, with a set of standards which will allow firms to adopt automated messaging. The benefits of safe, reliable and accurate data transfer across the industry are clear, and the time saved in manual re-keying will make any investment in software development pay for itself quickly.

If firms are looking for other achievable ways to automate processes, small changes can bring big returns. Investor research sources can be automated into a knowledge management system, bringing together disparate information and turning it into a decision support resource. Solutions that can gather intelligence from anywhere; Excel files, internet sources, databases, analyze that data and allow clear reporting, can assist its fund managers and investment analysts in making speedy, informed decisions.

If you are looking for ways to get that important competitive edge, automation could be the way forward.