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Citi introduces “Hedge Fund 3.0” model for fund managers

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Citi has introduced a new operating model for hedge funds, designed to help managers launch, manage and build successful hedge funds without excessive investment in non-core functions.

Citi Prime Finance’s Hedge Fund 3.0 details an outsourcing and partnership framework to help hedge funds achieve greater efficiency across their support functions and infrastructure, allowing them to focus on their core marketing, investor relations and investment management processes.
"The Hedge Fund 3.0 concept reflects the emergence of specialty providers who focus on the hedge fund industry, enabling fund managers to concentrate on key aspects of investment management while reducing their base of fixed costs," says Alan Pace, Head of Prime Finance in the Americas at Citi. "These experts have a keen understanding of the complexities of hedge fund management and can lift the burden of building and maintaining the infrastructure needed to handle complex trading strategies, as well as extensive regulatory and reporting demands."
Hedge Fund 3.0 allows fund managers to maintain strict control over a full range of processes with a smaller team and a less cumbersome technology model. In developing the Hedge Fund 3.0 concept, Citi Prime Finance relied upon its extensive research into the hedge fund industry, which showed that funds have evolved through several stages of maturity.
In Hedge Fund 1.0, the hedge fund industry was a niche business, with funds typically relying upon a single prime broker to support trading and reporting. In Hedge Fund 2.0, the next evolutionary phase, funds expanded to include more specialised arbitrage, event-driven, macro and credit-related strategies. Hedge fund portfolios expanded and became more multi-asset and more global, funds could no longer rely upon a single prime broker to support trading and monitor positions and balances. They built or bought their own trade, execution management and portfolio management platforms, backed by proprietary data centres and permanent, in-house IT development and support resources.
"As funds handled more functions internally, they needed broader expertise and more day-to-day management of resources," says Sandy Kaul (pictured), US Head of Business Advisory at Citi. "Organisations grew rapidly, the ratio of support functions to investment functions increased and more infrastructure and IT support was required to achieve the desired depth of controls. This led to a high fixed cost base and created problems in the wake of the global financial crisis of 2008."
The Citi Prime Finance Hedge Fund 3.0 model helps fund managers control the ratio of support staff to investment professionals, reduce the cost of the internal employees and remove the need for an extensive infrastructure and IT support function. The model introduces key service providers, all offering an aspect of the 3.0 operating model: Business process outsourcing for middle-Office, collateral management, cash & treasury, and reference data management functions; Specialist HR and benefits brokers, including professional employee outsourcing (PEO) options; Off-premise IT services, often leveraging cloud technologies to reduce IT costs; Knowledge process outsourcing (KPO) allowing hedge funds to outsource basic data analysis and information gathering to support risk management and ground-level investment research.
"While the Hedge Fund 3.0 model will benefit firms that are about to launch or are in the early stages of their development, the model is also useful for funds with established infrastructure and resources," Kaul says. "These firms can think strategically about the use of outsourced partners, especially when facing trigger events, such as, expansion to larger office space, replacing end-of-life equipment, moving to multi-currency operations, or launching a new investment strategy. Over time, many funds will move to a hybrid approach that combines in-house and outsourced resources."

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