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How Covid-19 is transforming the hedge fund outsourcing model

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The Covid-19 pandemic is opening up a deeper discussion around more business functions becoming permanently outsourced, particularly among start-up and emerging hedge funds battling against budgetary constraints. 

Speakers at the fourth annual HedgeweekLIVE North America Emerging Manager summit this week discussed how approaches towards outsourcing – traditionally the next step on the emerging manager journey after launch – have dramatically changed as a result of the coronavirus crisis and remote working. 

Jack Seibald, managing director and global co-head of prime brokerage and outsourced trading at Cowen, believes the pandemic has accelerated what had already been a meaningful upward trajectory in terms of outsourced trading. 

Initially driven out of necessity as a result of homeworking, many temporary solutions have turned out to be interesting opportunities for both managers and service providers, Seibald told the panel.   

“It opened up the opportunity for a more comprehensive discussion about whether outsourced trading as a permanent solution would be the right thing for them,” he explained. “We saw an acceleration of that process and it’s particularly noticeable among emerging managers.” 

“Many of the things that that we as an industry all believed had to be done in-house, on-site, now can be done remote,” added Mark Yusko, managing partner at Morgan Creek, who suggested that ‘outsourcing’ is no longer seen as a “dirty word” among investors. He spoke about the various outsourced relationships that have emerged, as well as hybrid models and other creative approaches taken among hedge fund firms of all shapes and sizes. 

“If you go back 20 years ago, the idea of not doing it yourself was an anathema,” Yusko said. “It still was still frowned upon by allocators. But now technology makes it easier.” 

Spruce Point Capital founder Ben Axler told the panel that the coronavirus pandemic has forced firms to evaluate what their competencies are, adding that his firm has taken the decision to make a permanent shift to working remotely. 

“Spruce Point is an activist, forensic research-intensive, short selling firm – that’s what we do well,” he said. “Everything else on the periphery – that’s not our core competency. During lockdown, we were quick to adopt all the collaborative tools like Slack and messaging so that we could continue to share ideas and fertilise our research in a less restrictive way.” 

Meanwhile, Jorge Hendrickson, chief revenue officer at Opus Fund Services, observed how outsourcing has helped put operational infrastructure on a “more even playing field”, evolving it away from the notion of “operational alpha” 20 years ago towards a more check-the-box exercise. 

“That then puts the focus onto the investment side of things for managers,” Hendrickson said. 

Yusko added: “In the past cost and size of team was a proxy for quality. In the analogue world, physical proximity was king. You needed your employees on site where you can see them and make sure you didn’t have a rogue trader; make sure you didn’t have somebody doing accounting shenanigans.” 

In the institutionalised sphere, this proxy-for-quality was dominant – but the acceleration of technology has overcome that hurdle, Yusko explained. 

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