EY has published the results of a survey of alternative fund managers and institutional investors all over the world. Among their responses to its questions, it has recorded a mine of information about the automation and outsourcing of regulatory functions and the way in which businesses handle the costs.

Between July and September of this year, Greenwich Associates (working on EY's behalf) conducted 102 interviews with hedge funds that represented more than US$1 trillion in assets under management (AuM) and 103 interviews with private equity firms whose AuM added up to double that amount. It also conducted 65 interviews with institutional investors - funds-of-funds, pension funds, endowments and foundations - with a combined total of $2.7 trillion AuM. Among the managers (as opposed to the investors) in the survey, North America accounted for 144 participants; Europe accounted for 34; and Asia accounted for 27. The survey is entitled At the tipping point - Disruption and the pace of change in the alternative asset management industry.

EY asked all alternative funds about the areas in which they invested in technology in the past two years. About 74% of hedge funds had done so in the field of compliance and regulatory reporting.

The accounting firm then asked all alternative funds in the survey the question: "if investing in robotics, in which specific areas have you evaluated/implemented robotics?" Although the greatest number of them by far pointed at their middle office operations (86%), 52% listed compliance and regulatory reporting as one area of robotic planning.

Outsourcing

EY asked hedge funds the question: "for each of the following functions, please rate your level of outsourcing." The results for compliance and regulatory reporting were:

• primarily outsourced: 8%
• equal mixture of in-house and service provider: 22%;
• some outsourcing: 43%
• do not outsource: 27%

The figures for private equity firms were very similar.

Many managers pass on the costs of external providers of services to the funds. The industry generally accepts the idea that it is legitimate to pass on the costs of fund accounting services and tax reporting, largely because this has been happening for decades. More recent areas whose functions businesses have outsourced - such as compliance and regulatory reporting - are often areas in which those businesses bear the costs internally because they became important in recent years, when investors were more concerned than ever about controlling expenses.

Managers were asked the question: "do you pass through the associated costs of outsourcing the following functions for this service to the funds?" In the case of compliance and regulatory reporting, 30% of hedge funds said yes and 23% of private equity firms said yes.

Regulatory risk and reputational risk

When asked what the greatest risks were that faced their organisations, the fund managers put the changing needs and preferences of investors first and placed regulatory risk second. For hedge funds, 56% listed changing needs while 43% listed regulatory risk (there was plenty of overlap); for private equity, 50% listed changing needs and 44% listed regulatory risk. Interestingly, only one-quarter listed reputational risk. Only 24% of the investors listed regulatory risk as one of their greatest risks, with 44% being worried about the changing need of investors.