Coronavirus crisis accelerates change in hedge funds’ outsourcing models

Coronavirus fallout

The second panel of this year’s Hedgeweek LIVE Europe summit focused on how evolving trends in outsourcing are changing hedge funds’ operating models.

Moderated by Michael Chambers, head of prudential at Wheelhouse Advisors, the discussion gauged the impact of outsourcing on hedge funds’ bottom lines, the main risks surrounding outsourcing, and how outsourcing is shaking up the manager-investor relationship. It also heard how Covid-19’s disruption of the workplace has proven a catalyst for change and growth for businesses.

William Callanan, founder and chief executive officer of Syzygy Investment Advisory, said the changes brought about by the coronavirus are not a temporary shift, and believes the pandemic has forced businesses to adapt and optimise to a new environment, placing a “significant element of rigour” on the cost-benefit equation among firms.

“Any type of crisis accelerates existing trends but also reveals new trends and opportunities,” Callanan said. “Challenge, competition – any type of pressure on returns drives innovation. This is a time to pursue that innovation.”

Pointing to the “consumerisation” of IT, John Bryant, CTO, Options Technology, suggested the ability to use products, tools and applications across platforms “regardless of where you are in the world” has driven further outsourcing to SAAS-type services.

“Investors increasingly are looking for predictability of outcome,” Bryant said. “The days of building it yourself and retaining your intellectual property within the square walls of your own domain have long gone. Outsourcing is here to stay.”

Phillip Chapple, Monterone Partners’ chief operating officer, said Covid-19 has flagged up issues relating to business resiliency, communications and KPIs. But he described the increased connectivity brought about by video conferencing as a “silver lining” during the lockdown period, with the development of “Zoom etiquette” helping managers further evolve relationships with outsourcers and investors.

“A lot of people were not comfortable before this, whereas now they are. You can do video calls with different service providers,” said Chapple.

“It’s the same with investors – we’re finding that we can share materials with investors over a video call, whereas before they wouldn’t have been comfortable with that. So although connectivity has been one of the challenges through the Covid crisis, it’s actually a benefit too. It’s not as good as face-to-face, but it’s better than a straight phone call.”

He added: “That is something that is here to stay. It makes people view relationships with outsourcers, with service providers, with their own teams in a different way. All of a sudden everything is having to behave in a way that it was never actually planned to behave.”

Speakers also weighed in on the importance of managers having a rigorous selection process when choosing service providers, and the need to spell out to clients why they have chosen a particular provider, along with the controls and risks relating to the relationship.

“When investors and regulators look at a regulated firm they want to get comfort that if we’ve outsourced something, we know what we’ve outsourced, we know what’s being provided, we have transparency, and there’s resiliency too,” expained Chapple, adding his firm sees its relationships with service providers as a “partnership.”

Callanan meanwhile drew attention to both “micro” and “macro” considerations when it comes to outsourcing functions. From a macro standpoint, emerging managers need to determine whether a solution is efficient from a cost, time and capital perspective.

“The ideal solution from a macro standpoint is the cost efficiency of headcount, the time efficiency for the CIO, and the capital efficiency on how you deploy capital,” he noted.

“On a micro basis, the key for an emerging manager is really engaging with people in core areas of competency, and to focus on solutions where people try to be a lot to a few and not something to everybody,” he said, adding that transparency with a service provider remains critical.

The panel also reflected on whether the sweeping changes seen this year herald a “golden period” for specialist outsourcing.

Bryant pointed to “at least half a dozen” hedge funds who have launched this year “without any sign of an office or a fixed abode.”

“They are using an amalgamation of outsourced products and stitching them together with their own glue. They are providing the integration between all of the SAAS tools or outsourced providers,” he observed. “The number of hedge fund COOs who have explicitly stated they are not planning to do in-house development within the foreseeable future only leads me to believe that this model is here to stay.”

Callanan said the work-from-home period has shown CIOs how certain resources within existing infrastructures could be outsourced to free up time for them to focus on alpha generation.

Chapple added: “Some of these trends may dissipate - but it has opened people’s eyes to what they can achieve with different things outsourced. It’s a trend that will continue.”