The PB Landscape, Fund Structuring & Evolving AI: What's Top of Mind for Hedge Fund COOs

With Intelligence recently hosted its Hedge Fund COO Summit and Hazeltree was proud to attend. The conference included information sessions that covered market positioning, AI strategy in fund operations, fees and costs, private markets due diligence, and prime brokerage's role in hedge fund growth. Below, you’ll find a recap of the key takeaways from the event: 

Markets & Portfolio Positioning

While the market as a whole is in a moment of flux, valuations are still well below dot-com levels, and returns have been strong across alternatives, private equity and asset managers. A State Street professional said that positioning is equity-heavy and overweight, mostly in the US and tech.

Most managers are showing conviction rather than worrying about a bubble, and few are hedging. In fixed income, the risk-on move is backed by fundamentals. The inflation outlook is poor, which points to higher yields ahead.

According to With Intelligence, managers with over $1bn in assets (the 'Billion Dollar Club') now hold roughly 86% of global hedge fund industry assets.

AI Strategy & Operations

Managers want a joined-up AI strategy rather than a collection of point solutions, but tools and vendors are changing so fast that it's hard to settle on one. Many of the event speakers warned against running AI projects in silos, and build versus buy is still an open question for almost every fund we spoke to.

For hedge funds, the recurring problems are data quality and coordinating rollout across the business. Budgeting is hard because vendor pricing is opaque and keeps changing. Training and culture have gotten as much attention as the technology, and several speakers described AI as a new team member that has to be managed. Some firms are just starting out, while others are years into their AI enablement journey.

Managers also expect their service providers to use AI, especially in legal and audit, and expect that to bring costs down. Provider output still needs work, so users have to keep ownership of the AI processes they rely on and of what those processes produce.

Fees, Costs & Fund Structuring

One-year lock-ups are common, and large managers are pushing for three to four years. Longer lock-ups mean much more disclosure to investors. There's been limited pushback so far, but new managers will find the same terms harder to get through. A professional from Boothbay Fund Management explained how fees are moving toward the US model.

Top talent is expensive, and that cost is driving structural change. Management fees are trending down while running costs go up. Some costs, like Bloomberg terminals, haven't drawn pushback because they're core to running the business. Others call for more judgement. Investors will generally accept infrastructure costs being passed through. They're less willing to cover marketing, since it can look like spending their capital to attract new capital.

Costs are rising across talent, multi-office space, technology (including AI), and compliance and legal. The recommendation was to disclose tech costs in the PPM and work with legal on treating them as a fund expense rather than a straight pass-through to investors.

Private Markets & Capital Allocation

Positive sentiment does lead to bigger allocations, but it won't win them by itself, and due diligence is still critical. Smaller managers matter to the ecosystem but find it harder to get approved for institutional money. On the operational side, ODD teams now expect at least an AI strategy.They also said that, ideally, a formal AI policy would be put in place by 2027, at which time AI capital expenditure should peak.

Prime Brokerage's Role in Hedge Fund Growth

Brummer & Partners shared how they split the prime broker landscape into three tiers:

• Tier 1: the big firms, consolidating
• Tier 2: looking for gaps in the market globally
• Tier 3: non-banks competing on technology and cost, not bound by Basel capital rules

Banks are expanding and posting strong profits. Balance sheet treatment varies from bank to bank, though, and that can become a bottleneck. As PBs consolidate, the bigger players can take on more risk through hypothecation, risk-weight reduction, SRT and similar tools.

Another key takeaway from the discussion is that hedge funds that work more closely and transparently with their PB get better service.

Several regulatory changes were prominently discussed, many of which are due in 2027: RWA capital constraints in the US, and the delayed EU implementation of FRTB and Basel 3. Concentration and balance sheet pressure could lead Tier 1 banks to drop smaller clients.

AI Governance & Compliance

Compliance risk around AI is now driving adoption, moving firms off spreadsheets and onto tools like ACA Group's Encore AI.

Managers were repeatedly asked why they're using a given tool and what job it does. The advice was to map existing processes first, check whether AI is the right answer, and look for gains beyond cost savings. Speakers put the tension between innovation and data confidentiality at the top of the list of internal conflicts.

Learn more

If you’d like to learn more about Hazeltree’s perspective on the hedge fund market, click here (https://hazeltree.com/book-a-demo). To meet us at the next With Intelligence event, click here (mailto:nthompson@hazeltree.com).