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Emerging managers: outsourcing giving start-ups a timely shot at survival

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Around 30% of emerging hedge fund firms plan to outsource more of their functions, almost double that of the industry average (17%), Hedgeweek research shows, as new managers embrace the opportunity to spend more time on alpha generation.

• New Hedgeweek research shows emerging managers remain a driving force behind outsourcing activity, with almost 30% planning more

• The pandemic has been an accelerant – the imposed shifts from “10 years of digitalisation within one year” proving successful and winning over skeptics

• And the trend is timely, freeing up stretched founders to focus on alpha generation at a time when markets are rife with opportunity


Around 30% of emerging hedge fund firms plan to outsource more of their functions, almost double that of the industry average (17%), Hedgeweek research shows, as new managers embrace the opportunity to spend more time on alpha generation.

The finding featured prominently in Hedgeweek’s latest Insight Report, The Next Generation: How emerging managers are adapting to the new hedge fund landscape.

In the report, interviewees noted how remote working brought about by Covid-19 demonstrated that certain activities no longer need to be kept all under one roof, further accelerating the outsourcing trend.

“We had 10 years of digitalisation within one year,” observed Alyx Wood, chief investment officer at Kernow Asset Management.

Today, having off-site information technology infrastructure is “the de facto play”, said fellow interviewee Faryan Amir-Ghassemi, co-founder of Epsilon Asset Management, adding this would have been unheard as recently as the early 2010s.

Why the shift? “Partly because of Covid, partly because of the changing landscape, partly because of the importance of cybersecurity and just the importance of information technology in running a modern business,” Amir-Ghassemi explained.

Cost-squeezed emerging managers are now willing to outsource more of their business functions to third-party service providers that can offer specialist expertise across tech, operations and regulatory functions, while keeping in-house core competencies such as portfolio management and trading activities.

And the timing could not be better.

Industry performance may have been mixed in 2022, but emerging managers have, as the report shows, continued to outperform their established peers, and attendees at this month’s Hedgeweek US Emerging Managers Summit spoke of a trading environment rife with volatility and opportunity.

Outsourcing, several said, has ensured they have been better able to focus on alpha generation in 2022, helping to build a track-record investors are willing to commit to.

Investors – many of whom remain wary of untested start-ups – are keen to avoid manager blow-ups in an increasingly volatile market environment.

As well as risk management, regulation is seen as a particularly pressing challenge for fledgling funds, with investors now placing extra scrutiny on firms’ compliance expertise, which industry participants say can often make or break an allocation decision.

In turn, more than half (55%) of emerging managers have increased their outsourcing of compliance functions because of regulation trends over the last year, Hedgeweek’s survey data indicates.

“We have seen some initial investors, some of the managed account platforms, are unwilling to allocate directly to a brand-new manager unless that manager can demonstrate sufficient expertise to be able to handle and manage that regulatory framework,” said Ant Bennett, head of sales and client development, ACA Mirabella.


Key implication | Emerging managers: Hedge funds launching with smaller in-house operational footprints and infrastructures have more time to focus on what really matters – alpha generation. And with market conditions currently favoring active portfolio management, outsourcing in 2022 could be the key to establishing the next generation of managers.


 

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