Hedge Fund Outsourcing
‘It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…’ – Adam Smith
The hedge fund industry is no stranger to outsourcing. As elements of the investment management industry have grown more complex, from regulation to public relations, the need to leverage external knowledge has increased. Over the last 10 years we have seen the emergence of Regulatory Hosting and Middle and Back Office solutions, and let’s not forget the well-established third-party marketers who have been present since the re-emergence of hedge funds in the 1980’s.
The broader business of outsourcing itself is going through a seismic shift, and this in itself is filtering through to hedge funds. The traditional model, one focused on labor arbitrage, repetitive process orientated workflow and lower operating costs, is morphing into a new model, driven by value added strategic services, smaller scale operations, onshore solutions and, most importantly, the application of technology.
If It Ain’t Broke, Don’t Fix It!
The adoption of a broader integrated outsourced model is being welcomed by investors and market participants alike. The pace of evolution within the hedge fund industry is staggering, driven by the continuous flow of new managers forming. From our own experience, we have seen a dramatic shift in sentiment in the last 5 years alone. Conversations with potential clients originally revolved around ‘Why?’, today it is ‘How?’.
In a recent Goldman Sachs survey, the level of investment managers outsourcing part of their middle and back office services was close to forty percent. Interestingly though, only two percent of respondents were actively planning to outsource these functions. This in itself is not surprising, as there are sunk costs, potential service disruption and just as important, a pool of talent to consider.
As Adam Smith identified in his seminal book, ‘The Wealth of Nations’, the division of labor is key to efficiency. Within a boutique investment firm, the degree of division is limited, and thus are the efficiencies. Through outsourcing, investment firms will benefit from a deeper knowledge base, improved process flow practices, institutional level governance and control and ultimately flexibility. Overarching all of this must be a technology. To draw the best from all of these elements, it must be integrated into a technology that not only knits the entire process together, but also provides the client with transparency.
Outsourcing any element of a process carries with it risk, but this must be weighed against the risk of maintaining the process internally. Costs will also play a part in the decision process, but it will be the cost of not outsourcing that will drive this emerging sector forward.
To learn how Quay Partners can guide your business to success, contact us for more information.
Quay Partners Group delivers bespoke investment management solutions to independent hedge fund managers and family offices.
Thomas Underwood, the Founder, has over 20 years’ experience in managing and operating hedge funds.