What's keeping the buy-side up at night?

There has been extensive research into the challenges and opportunities facing the buy-side recently, we take a look at some of the results and discover what is keeping the buy-side up at night.

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Part of growing up means that the bogeyman no longer keeps you awake at night, in fact it’s much more likely to be derivatives worries according to new studies.

Well perhaps that is a slight exaggeration, but there have been a handful of recent studies looking into the top business challenges and concerns facing the buy-side. Among those to conduct research have been Aite Group, State Street and tech vendor Object Trading, and the results. The results of their extensive buy-side surveys show that there is plenty to be worried about.

Somewhat unsurprisingly, the impact of increased regulation is topping the buy-side’s most pressing concerns, according to a recent survey from Aite Group.

The authors of the report even noted that buy-side-focused regulation might begin to rival that aimed at the sell-side if non-bank reform continues to be drafted at the current pace.

According to the results, 68% of firms are concerned about the impact of increased regulation, including the wholesale changes to OTC derivatives trading, margin requirements and best execution, to name a few.

While there has been a lot of talk about new regulations for the past seven years or so, the next few years represents the implementation stage, giving the buy-side plenty to worry about. The European Market Infrastructure Regulation, MiFID II and Basel III are all on the horizon, and apparently causing plenty of sleepless nights.

After regulations though, there were some more interesting aspects of the industry topping their concerns. These had more to do with the structure of the business and were not directly linked to regulatory change.

Concerns over retaining employees

Achieving efficient operations and reducing costs attached to those operations were high up on the list, along with keeping technology current and relevant.

A fifth of firms were also worried about retaining employee skill sets and expertise. Certainly with new regulations increasing the importance of certain roles in specialisms such as collateral and clearing, the importance of maintaining those skillsets is becoming crucial for buy-side firms.

Tech vendor Object Trading was another firm to interview a range of hedge funds, proprietary trading houses and commodity trading advisors in its research, charting their main concerns regarding in the global futures markets.

Trading costs, market access and sell-side retrenchment were the top concerns for buy-side firms active in listed derivatives trading.

Many other concerns were also regulatory driven, such as rising costs and sell-side bank scaling back their clearing services.

The paper noted that for tier two and three buy-side firms, the challenge of opening accounts with bank clearing brokers is becoming increasingly difficult.

The Trade Derivatives has had particular focus on the buy-side’s search for clearing brokers in recent editions, and on page 42 we look at what their criteria currently is when looking for their perfect partner.

Other concerns stemming from Object Trading’s report included execution quality, fragmented liquidity and unprecedented variation in volatility.

“Dramatic changes in market structure have increased the complexity and success of running a trading business,” Steve Woodyatt, CEO of Object Trading.

“Sell-side retrenchment due to regulatory costs and explosion of markets and products has become an issue. We’re noticing bifurcation of the buy-side as a result.

“The two camps are: those who are hunkering down waiting for the good times to return, where some have shut down already or are choosing to merge to achieve scale; and, those who are flourishing in the new environment. Of the factors within their control, a primary and perhaps surprisingly effective lever to building resilience is taking back control of their market access.”

It’s not all doom and gloom

In search of a silver lining to all the negativity prompted from these surveys, State Street decided to conducts its own research entitled ‘Opportunities for Optimism’. The financial services firm surveyed 400 senior executives in the asset management industry.

The results showed positivity, despite one in four senior asset management executives believing it’s “highly likely” they will face direct competition from a non-traditional new entrant such as a technology or non-financial services company within the next five years.

The findings revealed asset managers are in a positive mood according to State Street. Apparently, as the assets under management continue to increase, many asset managers are making big plans to catch the next wave of growth. Over the next three years, some 42% of the survey respondents said they are preparing to enter a new product category for the first time, 52% plan to expand distribution networks and 48% will tap new distribution channels.

In addition, the research also shows that acquisitions are set to reshape the fund management industry – 46% of those surveyed said they are evaluating acquisition opportunities today.

“Our findings show that a number of asset managers are overhauling their approach to respond to changing investor needs and new competition– from offering new investment solutions to making strategic acquisitions to become more competitive and grow their businesses,” says Jane Mancini, senior vice president and head of asset manager sector solutions at State Street.

“As new entrants eye the sector, success will increasingly depend on technology and data analytics to address the growing demands of clients for more personalised and sophisticated information and investment solutions.”

Rethinking business strategies

Overall, State Street’s report looked at what fund managers see as the biggest risks and opportunities facing them today. The final report shows that they must adapt to new client needs, meaning they need to focus more on multi-asset strategies, providing greater transparency and delivering a more personalised approach.

According to the results, 70% of asset managers State Street interviewed said they are having to rethink their business strategy around demand for multi-asset strategies, while 64% said that heightened risk and compliance demands threaten to divert resources from the critical business areas.

Elsewhere, a resounding 96% of asset managers added that they are under pressure to reduce costs.

“Asset managers are focusing on improving their client and competitive proposition; forging closer partnerships with investors; providing clients with the integrated yet highly granular view of portfolio risk they need and developing innovative models that will see off the threat from new market entrants,” adds Mancini. “They also need to invest in their operating infrastructure to allow them to be more transparent, insightful and cost efficient for investors.”