Hedge fund managers have cyber security fears and are facing increasing demand from investors for customised services.

Those are among the findings of a report on the global industry by EY, entitled “Shifting Strategies: Winning investor assets in a competitive landscape”.

Cyber security and use of cloud-based services is high on managers’ list of concerns.

“Breaches and security issues are in the news daily,” the report states. “And global regulators are convening to determine how best to address concerns, raise awareness, and determine sensible governance and oversight.

“About half of the managers we surveyed use the cloud. But many of the larger managers do not, citing security concerns as the primary barrier. However, many may be using the cloud without realising it, because it is likely that some of their vendors are. “Managers should be aware of the risks to their data via attacks on their service providers.”

EY advises: “When storing data — whether in the cloud or on physical backups — managers need to have in place standardised, well-defined processes, controls and protocols. With appropriate security and controls in place, the cloud can provide an efficient and less expensive way for managers to store data.”

The report also finds that larger hedge funds especially (with assets under management of more than $10 billion) are churning out new products to meet investor demand for targeted strategies, as well as tailored terms and fees.

“Investor appetite appears strong for these products,” the report’s executive summary states. “But their impact on managers’ margins is noticeable due to their generally lower fee structures. Mid-size and smaller managers focus on increasing growth through their current offerings to existing clients and reaching new investors.”

The rush to create new products carries dangers, the report adds.

“Managers must beware the herd mentality when considering a new product launch,” it states. “They may want to look to their peers in the traditional global asset management industry for lessons about what happens when product offerings are expanded too rapidly.

“In the traditional industry, many managers have evaluated their hasty expansion of products and are now making cuts to their offerings.”

Jessel Mendes, a partner at EY Bermuda, said: “The hedge fund industry has played an important role in the growth and revitalisation of the asset management industry in Bermuda.

“Our annual survey — now in its eighth year — provides valuable global insights to the hedge fund marketplace and touches on a number of the key challenges and opportunities that firms are facing, including here in Bermuda.”

The report states that the main source of investor capital has shifted — from high-net worth individuals, to funds of funds, to institutional investors, and now to private wealth platforms.

In an increasingly competitive market, in which regulatory and compliance expenses are on the increase, fund managers continue to cut costs by reducing their back-office headcount and outsourcing more work. They are also investing more in technology to achieve further efficiencies.

EY concluded: “In today’s environment, managers must work hard to differentiate themselves from the competition. They must provide a compelling explanation of their investment philosophy and processes.

“And to turn these developments into growth, managers need to invest in: marketing and distribution talent; front-office capabilities to support strategies; infrastructure to support products.”

One of the most interesting findings of the survey from a Bermuda perspective was that 20 per cent of pension funds and endowments surveyed said they currently invested in or planned to invest in insurance-related products.

Bermuda has become the global leader in insurance-linked securities and the survey’s finding confirms the thinking that ILS is becoming a widely accepted alternative asset class for pension funds.