AS THE HEDGE FUND INDUSTRY CONTINUES TO EVOLVE, HFMWEEK TALKS TO JAYESH PUNATER OF GRAVITAS ABOUT THE RISE OF THE CO-SOURCING MODEL
Outsourcing has come to play an increased role in the hedge fund industry. As the job of managing a hedge fund has grown to be more complex, along with the increased expertise of sophistication and growing availability of service providers, outsourcing non-core business activities is now the norm. But is this model right for all hedge funds? The rise of co-sourcing has allowed for the best of both worlds, with duties being outsourced while under the direct control of the hedge fund. To find out more, HFMWeek talked to Jayesh Panater, founder and CEO of Gravitas, about the state of co-sourcing in the hedge fund industry and the opportunities it delivers.
HFMWeek (HFM): What benefits can a co-sourcing model deliver over a strictly outsourcing model?
Jayesh Punater (JP): Co-sourcing, as we see it, is the next generation of outsourcing. As the business environment becomes more challenging, financial pressures are forcing funds to re-examine their business models. This requires service providers to play a more pro-active role. Co- sourcing is an adaption of traditional outsourcing models in a way that the clients have more control over how the service is provided. The way we at Gravitas define co-sourcing is that it is a collaborative partnership between the fund and the service provider in order to achieve a pre-agreed set of deliverables. It enables a fund to scale with better control, transparency and flexibility at a fraction of the cost of hiring internal resources. This is especially the case with Gravitas, as when we are involved we are able to leverage our global presence as well as our technology. The ultimate goal of co-sourcing is to provide a client with the freedom to focus on their core competencies without having to sacrifice time and control on periphery duties. We saw many funds challenged to deliver on all fronts, especially in today’s transparency-conscious and heavily regulated climate. We were able to work with some of our clients to work on this model so we can accomplish the scale and resources needed with the controls that traditional outsourcing doesn’t necessarily offer.
HFM: What aspects should a hedge fund manager, depending on their strategy and size, keep in mind when carrying out due diligence on a service provider?
JP: Two of the key factors to consider are specific domain expertise, (such as expertise in credit research versus equity research) and the breadth of services offered. It is often more effective to select a provider who can service multiple needs and understand the particular requirements of your fund holistically. These are a few immediate questions that need to be considered by any fund: Does the service provider have relevant core capabilities? Do they have, depending on the service required, a global reach? And the fund managers need to ask themselves, do they have the internal resources to manage and work with the service provider? Most importantly, you need to step back and address what aspects of your business you are looking to entrust to the service provider. Are they middle office functions, back office functions or front office functions? Each of these sectors has different requirements, which need to be considered carefully.
HFM: How valuable is an external perspective when it comes to providing a given solution to a hedge fund?
JP: It can be very valuable as an experienced service provider will have know-how of working with hundreds of funds, which allows them to identify certain trends or possible issues. Therefore, they can usually suggest the best ways of solving issues or the most appropriate models to deal with problems. For example, our fund clients include a range of different strategies and sizes, each with unique challenges and objectives. With our wealth of experience working across the industry, we are able to deliver an external perspective on how each manager in each situation can approach their respective problems in different ways to arrive at the best solution.
HFM: In terms of risk analytics how was this requirement evolved for hedge funds and how have IT solutions responded?
JP: Traditionally, this was the role of our clients with their own internal controls reporting on risk across the assets and funds they were managing. Now, however, with the changing regulations, the manner in which this is tackled has changed somewhat. Risk varies from fund to fund but the industry as a whole has had to sit up and pay attention to regulatory requirements and increasing client needs. For instance, with Form PF, everyone has to do some risk reporting. And now Open Protocol Enabling Risk Aggregation (Opera) standards mean that all clients have to instill Opera-compliant risk reporting. Risk is slowly becoming a more holistic issue and so the emphasis on managing huge amounts of relevant data has been heightened. Therefore, some service providers such as Gravitas are able to provide our clients with reporting systems for different parts of a fund’s business. As we mentioned before, the co-sourcing model enables fund managers to retain more control during this process. Most people tackled the growing risk reporting issue by hiring additional people and buying an out-of-the-box risk system. However, this was inefficient and costly. With a co-sourcing model the best of both worlds is delivered – the technology and staff are accessible while under the remit and control of the fund.
HFM: The cloud is becoming increasingly popular, but some fund managers still view the solution as unsecure. Are these worries founded?
JP: I believe it is a largely perception-led issue as in reality the cloud can be more a secure solution than an internal set-up. A private cloud, created and maintained correctly with the right service provider, can provide better security, an increased and robust computing capability, scalability and greater cost-effectiveness. For example, during the power outages and infrastructure damage caused by Hurricane Sandy on the East Coast, Gravitas clients on our private cloud were not affected. Some managers perceive that by having the equipment physically in their office that is secure – but this is not true due to possible infrastructure damage, malicious employees and the rising danger of hacking. The cloud gives small and medium-sized funds similar capabilities of larger firms at an affordable and manageable operational cost. Even with private cloud, not all cloud providers are equal. If you use a public cloud provider who doesn’t specialise in financial services for your technology needs, the service issue becomes notable. For example, who can you call during an outage? It is important to have the right technology and resources on board for the cloud so you need to ask these providers different questions, for example how are your different clients’ applications and email segregated?