hedgeweekLIVE North America: Pandemic lockdown is accelerating hedge fund outsourcing trends

Outsourcing

The trend towards outsourcing – a continually evolving sphere within the global hedge fund industry – is likely to have been further accelerated by the coronavirus pandemic, as managers embrace the ‘digital-first’ approach brought about by the coronavirus lockdown, speakers at this year’s hedgeweekLIVE North America digital summit said.

Emerging and start-up hedge funds have long been confronted with decisions over whether to build, manage and maintain their business infrastructure on-site, or outsource non-investment related functions.

Panel discussion 5: Exploring the Outsourcing Model

Moderating the panel, Jack Seibald, managing director and global co-head of prime brokerage and outsourced trading at Cowen, noted how there had been an uptick in incoming inquiries for his firm’s services during lockdown.

“Everyone had a business continuity plan but it quickly transitioned from that to working from home,” Seibald said, noting that many firms were caught out by not having suitable remote trading technology for home-working.

Mark Yusko, founder, CEO and CIO of Morgan Creek Capital Management, suggested the pandemic has made people realise “that maybe we don’t need to commute an hour and a half each way” to work every day.

“As things become more digital and we get used to digital-first, you’re going to see more disparate and decentralised businesses along with networks and opportunities,” he said of evolving trends in outsourcing.

Panellists examined how fledgling hedge fund firms can strike a balance between a closer embrace of remote technology and maintaining the creative “ideas factories” of physical trading floors. They noted how even larger funds are beginning to consider outsourcing for the first time, with the trend migrating upwards among bigger firms.

The remotely outsourced model can also help address the challenge of sourcing talent for certain business functions, particularly for firms disadvantaged by not being based in major cities, according to Yusko, who said hedge fund managers no longer need to be based in New York, London, Chicago or Shanghai.

The discussion also explored cost considerations for start-up funds, the quality of service providers, and whether certain business functions should always be maintained in-house. 

Kieran Cavanna, co-founder & CIO, Old Farm Partners, offered an allocator’s perspective, describing the evolution in outsourcing as “a great trend” for managers. But he sounded a note of caution on managers looking to save money by expensing certain outsourced functions directly to their fund.

Speakers said that while almost every back-office function can be outsourced to a service provider, firms must maintain one key individual in-house to oversee the process.

Even if large chunks of the business are outsourced, the strategic planning of the firm will always reside with the hedge fund manager, who is ultimately responsible for “any and all” outcomes, explained Alex Prylucki, managing partner at LEVVR.

The benefits offered by outsourced providers are much greater than any one single individual a firm can hire, Prylucki noted. He added firms can take advantage of time zone differences with outsourced functions, with trade reconciliations for US managers being completed overnight by service providers in Asia, for instance.

Building on this point, Mark Yusko added: “If you get to the point where you have so many outsourced functions, you can create this ecosystem that works really well together.

“But where I’ve seen managers struggle is when they think they can blame a service provider if something goes wrong with the fund. They can’t.”

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