Omgeo North American Advisory Board 20 Jan 2010

Buy-Side Industry Trends,[object Object],Omgeo North American Advisory Board,[object Object],21 January 2010,[object Object],Holly H. Miller, Partner,[object Object],Stone House Consulting, LLC,[object Object],© 2010 Stone House Consulting, LLC,[object Object],1,[object Object]

Agenda,[object Object],What is coming?,[object Object],What are the implications?,[object Object],How do we position ourselves most effectively?,[object Object],© 2010 Stone House Consulting, LLC,[object Object],2,[object Object]

Genesis of Our Opinions,[object Object],In-depth knowledge of the investment management business with 30+ years of experience,[object Object],Stone House / The Glass Hammer survey conducted September / October 2009,[object Object],94 respondents,[object Object],75 firms,[object Object],$7 trillion AUM,[object Object],Current Investit Intelligence research project on transparency,[object Object],Current client projects,[object Object],Meetings and discussions with managers and their service providers,[object Object],© 2010 Stone House Consulting, LLC,[object Object],3,[object Object]

What Is Coming?,[object Object],Convergence,[object Object],Emphasis on due diligence,[object Object],Continued focus on transparency,[object Object],Regulation,[object Object],Significant operational and reporting changes,[object Object],New challenges and approaches human capital,[object Object],M&A activity,[object Object],Emphasis on management of firms rather than just performance,[object Object],© 2010 Stone House Consulting, LLC,[object Object],4,[object Object]

What Is Driving Change?,[object Object],Need to make up losses quickly,[object Object],Unwillingness to pay premium fees for mediocre or poor returns,[object Object],Rich talent pool seeking new opportunities,[object Object],New focus on the bottom line,[object Object],Recognition that alternative investments are not an asset class,[object Object],Unreasonable expectations,[object Object],Pent-up ideas,[object Object],Opportunity – and lots of it,[object Object],© 2010 Stone House Consulting, LLC,[object Object],5,[object Object]

Convergence,[object Object],Hedge funds will increasingly begin to look like traditional investment managers,[object Object],High likelihood of oversight and registration,[object Object],Greater transparency and reporting demands,[object Object],Increased scrutiny of operational infrastructure and risk,[object Object],Adoption of separate accounts,[object Object],Increased emphasis on compliance,[object Object],Introduction of long-only strategies,[object Object],Lower fees,[object Object],Traditional investment managers will continue to adopt some hedge fund practices,[object Object],Launching hedge fund products and strategies,[object Object],Acquiring hedge fund managers,[object Object],Introducing performance-based fee structures,[object Object],Each will examine the other’s business and operating model,[object Object],© 2010 Stone House Consulting, LLC,[object Object],6,[object Object]

Emphasis on Due Diligence,[object Object],Investor / client due diligence of funds and managers,[object Object],Hedge funds are seeing it already,[object Object],Traditional investment managers will undergo operational due diligence reviews more often,[object Object],Manager due diligence of counterparties,[object Object],Manager due diligence of service providers,[object Object],Custodians,[object Object],Prime brokers,[object Object],Fund administrators,[object Object],Software providers,[object Object],Evaluation of independence,[object Object],Small providers may be viewed as lacking independence from their largest clients,[object Object],Segregation of services may be required,[object Object],© 2010 Stone House Consulting, LLC,[object Object],8,[object Object]

Continued Focus on Transparency,[object Object],Not a recent phenomenon,[object Object],Not going away,[object Object],Complex quantity,[object Object],Not well understood,[object Object],Transparency is not always good,[object Object],© 2010 Stone House Consulting, LLC,[object Object],13,[object Object]

Areas of Transparency,[object Object],First Dimension: Visibility,[object Object],Source: Investit Intelligence report on transparency 1Q10. Used with permission.,[object Object],© 2010 Stone House Consulting, LLC,[object Object],14,[object Object]

Areas of Transparency,[object Object],First Dimension: Visibility,[object Object],Second Dimension: Clarity,[object Object],Source: Investit Intelligence report on transparency 1Q10. Used with permission.,[object Object],© 2010 Stone House Consulting, LLC,[object Object],15,[object Object]

Regulation,[object Object],[object Object]

Self-regulatory organizations and initiatives?,[object Object],[object Object]

Significant Operational and Reporting Changes,[object Object],Enterprise-wide data needs have increased,[object Object],Investment risk management,[object Object],Operational risk management,[object Object],Reporting,[object Object],Reporting requirements have increased,[object Object],Content,[object Object],Timeliness,[object Object],Transparency,[object Object],Adoption of separate accounts by hedge fund managers,[object Object],Shadow accounting requirement for hedge funds,[object Object],© 2010 Stone House Consulting, LLC,[object Object],19,[object Object]

New Challenges and Approaches with Human Capital,[object Object],Hedge funds will look to hire more staff from traditional investment management firms,[object Object],Significant staff turnover coming in some organizations,[object Object],Many firms did not treat their staff well during the downturn,[object Object],New criteria for firm leadership,[object Object],Portfolio management will no longer be the primary career track for future CEOs,[object Object],Performance measurement,[object Object],Risk management,[object Object],Operations and IT,[object Object],© 2010 Stone House Consulting, LLC,[object Object],23,[object Object]

Survey Question: What Are Firms Doing to Attract and Retain Staff?,[object Object],“Not much from what I can see.”,[object Object],“These days it appears to be a buyer’s market.”,[object Object],“Not a lot right now…it almost seems to be ‘be happy you have a job.’”,[object Object],“For 80% of the firm – nothing worthwhile and generally are turn-styles for cheap help. The smart cheap help educates themselves for 12 months and then moves on usually to another firm for much better wages and treatment.”,[object Object],“I don’t think this is likely the focus at most firms right now. The assumption, it seems to me, is that there is no place to go, so firms aren’t too worried about retention. In addition, there is a lot of available talent from firms that have gone under, or sell-side firms that have laid people off or buy-side firms that have downsized.”,[object Object],© 2010 Stone House Consulting, LLC,[object Object],27,[object Object]

Survey Question: What Are Firms Doing to Attract and Retain Staff?,[object Object],“The issue of talent acquisition, management and retention will develop into the key strategic issue facing companies over the next few years. A recent survey of HR Professionals reports that 73% of respondents indicated that most senior management that they principally work with perceives the HR function as helpful, positive, pro-active and a strategic function. Fully 65% ranked ‘identifying and recruiting top quality talent as important to the future of the company and a talent acquisition process that was thorough, consultative, and always produces expected results’ as one of the top two of importance. 65% of respondents also indicated that to attract, hire, motivate and retain quality employees, and make sure they are successful over the long-term, that they (management and HR) understand and accept what is required to help employees succeed in terms of competitive compensation, continued professional training and development, and that they are willing to make that investment. Yet 62% of the same respondents felt that their company does not have an effective talent management process. Further, 44% of respondents felt that their company’s talent acquisition process was ad hoc, informal and often unsuccessful. Lastly, fully 92% of all survey respondents indicated that identifying and recruiting top talent is very difficult. Until the development of human capital is regarded as precious, attracting and retaining staff will be a major risk factor for all companies.”,[object Object],© 2010 Stone House Consulting, LLC,[object Object],28,[object Object]

M&A Activity,[object Object],Reasons to acquire:,[object Object],Obtain new or complementary strategy,[object Object],Successful track record of target firm,[object Object],Existing client base of target firm,[object Object],Obtain new or complementary distribution channel,[object Object],Obtain new or complementary infrastructure (operations, IT, compliance, client service, internal finance),[object Object],Create scale,[object Object],Reputation,[object Object],Reasons to be acquired:,[object Object],Expansion opportunities,[object Object],No transition plan for key executives,[object Object],Re-focus on investment management,[object Object],Inadequate infrastructure,[object Object],Poor track record,[object Object],Lack of scale,[object Object],Liquidity for founders,[object Object],Reputation,[object Object],© 2010 Stone House Consulting, LLC,[object Object],31,[object Object]

The Current Trend Toward Consolidation Will Continue,[object Object],Distribution of Top 250 Asset Managers,[object Object],Source: Pensions & Investments; Stone House Consulting Analysis,[object Object],© 2010 Stone House Consulting, LLC,[object Object],32,[object Object]

The Current Trend Toward Consolidation Will Continue,[object Object],Distribution of Top 50 Asset Managers,[object Object],Source: Pensions & Investments; Stone House Consulting Analysis,[object Object],© 2010 Stone House Consulting, LLC,[object Object],33,[object Object]

Emphasis on Management of Firms Rather Than Just Performance,[object Object],Can you run your company as well as your portfolio?,[object Object],© 2010 Stone House Consulting, LLC,[object Object],38,[object Object]

What Are the Implications?,[object Object],Increased demand:,[object Object],Systems,[object Object],Outsourcing,[object Object],Consulting services,[object Object],Operational due diligence services ,[object Object],Auditing services,[object Object],Operations and IT professionals,[object Object],Data management and data mining strategies rise in importance,[object Object],Rising insurance costs,[object Object],Lower unit staffing costs for hedge funds but potential rise in costs overall as many staff up,[object Object],The middle and back offices may take less of a back seat,[object Object],© 2010 Stone House Consulting, LLC,[object Object],39,[object Object],[object Object]

Hedge against staff turnover (though generally not a short-term solution)

Systems / service evaluation / selection

Omgeo North American Advisory Board 20 Jan 2010

Omgeo North American Advisory Board 20 Jan 2010

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Omgeo North American Advisory Board 20 Jan 2010

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