Finding solutions that provide economies of scale, technology advances and operational efficiencies is increasingly important for hedge fund managers, particularly in light of the changing regulatory environment and stringent investor demands. Outsourcing certain middle-office administrative functions is one option that has gained traction, but issues around accountability, as well as a lack of control, have meant that this does not suit everyone.
For companies wishing to strike a balance between keeping all services in-house or outsourcing them, co-sourcing can be ideal. Jayesh Punater, CEO and Founder of Gravitas speaks to HFMWeek about their unique co-sourcing service and its benefits for funds looking for a smarter way to scale.
For a copy of our whitepaper on co-sourcing, please contact your Gravitas Relationship Manager or firstname.lastname@example.org.
HFMWeek (HFM): What are main factors behind the growth in co-sourcing? What are the benefits of co-sourcing for hedge fund managers?
Jayesh Punater (JP): Co-sourcing is a unique form of collaborative outsourcing which we piloted in 2008 with a very large, complex fund. Co-sourcing addresses the need for firms to scale certain functions across the front and middle office, such as risk management, research, operations and technology, without adding significant headcount or upfront costs. We partner with clients to co- develop a customised integration of people, technology and processes, and offer that as a ‘co-managed service’. The idea of co-sourcing is a result of our clients’ needs to operate over the past five years in the rapidly changing capital markets landscape where focus has intensified on the alternative industry.
We are pioneering a new business model that provides hedge funds and managers an alternate way to grow and scale their operations with greater flexibility and efficiency at significant cost savings. The key benefit of co-sourcing is that, unlike outsourcing, clients have control over the staff, technology and workflows that are developed and integrated into their firm. Pension funds and endowments have underperformed their benchmark significantly so investors now have a very large appetite for real alpha. This presents tremendous growth opportunity for alternative funds, specifically hedge funds, which is evidenced in growing portfolio allocations. Exposure has increased from less than 5% to more than 20%.
With this growth, however, are regulatory pressures sweeping across the financial industry, from the Alternative Investment Fund Managers Directive (AIFMD), Fatca and Form PF rules, to anti-money laundering (AML) regulations. It is imperative for hedge fund managers to ensure their business models are compliant and cost-effective while pursuing these large growth opportunities. Our offering delivers savings of between 25 and 55% on a function-by-function basis. Our co-sourcing service provides a full range of operational, risk, research and software development services. Implementing co-sourcing selectively or across all middle-office functions, allows Gravitas clients to benefit from crucial administrative and management efficiencies, while ensuring that internal teams can focus on the most critical aspects of their job such as managing their assets and growing their business.
HFM: What type of clients is your platform for?
JP: We have recently launched co-sourcing as a formal offering and we’re attracting a diverse range of clients as the industry becomes more comfortable with this business model. We’ve had enquiries from very large, established firms who have done everything in-house for years but are concerned about rising costs, to start-ups who are happy that they don’t have to invest in all of the systems and staff required to run their fund. Co-sourcing is a means to redefine any business structure.
The platform is flexible – it can work for any fund strategy and can be adapted to the needs of the client. A company can implement the co-sourcing model as a whole, or can simply apply one aspect of it to meet their immediate requirements. For example, small or emerging funds can opt for Risk Reporting Plus which offers risk reporting and access to seasoned Gravitas risk analysts who aggregate, analyze, and monitor risk metrics using IBM Algorithmics’ risk engine, or commit to a dedicated analyst who can sit onsite with the client or in our Mumbai office.
HFM: Are there any challenges to co-sourcing within larger firms? How can they be overcome?
JP: Usually the initial challenge with many of the larger firms is, while they understand the model and its benefits, they question how it can be executed if they already have everything in-house. We work through this by identifying an area of need in the firm, such as risk, technology, or cloud computing. We choose a specific entry point and demonstrate the unique value-add that co-sourcing offers.
Another challenge is concern over cultural fit. When existing firms look at adopting the co-sourcing model, their initial perception is that the co-sourced staff will not share the same work ethic or culture as an internal hire. We emphasize that clients are very much part of the staff selection process, whether selecting members of existing Gravitas teams in Chicago, New York or Mumbai, or recruiting new external staff.
Misperception about security can also be challenging. When clients undertake co-sourcing with us, they can access a completely segregated, private cloud, managed by Gravitas to ensure there are no security breaches or compromises. Respective captive teams and their work environments are segregated as well.
HFM: Given the long-term nature of a co-sourcing relationship, what should a firm consider when choosing a co-sourcing service provider?
JP: One of the key things to consider is the breadth of services offered. Companies don’t want one co-sourcing partner for operations, another for risk or technology and so forth. Working with one partner is more efficient, cost-effective and ensures that the client maintains control over the Gravitas offering. It’s also important that firms partner with a provider that has the relevant expertise and experience in delivering this kind of service as the work involved is detailed, complex and bespoke. Lastly, the quality of staff is critical and ensuring that firms have the right staff should be part of the evaluation process.
HFM: Gravitas is at the forefront of this business model. How will you continue to develop?
JP: As the industry continues to thrive, I believe more and more firms will embrace this model. It really provides an innovative solution to the needs of many businesses, regardless of size or stage of development. We have seen a tremendous amount of dialogue around co-sourcing on a daily basis and anticipate this will continue.
Our approach is to tackle and simplify the most dif- ficult and complex problems first. We are very good at problem-solving and bringing innovation to the market for clients. Our partners are some of the biggest and best firms in the industry, which demonstrates the quality of our offering. This collaborative thinking will continue to drive the development of our co-sourcing platform. Our entire business model is changing and the energy we are creating within our own firm is amazing. We are very excited to be able to provide an innovative service that is not only delivering value but also changing the dialogue in the industry.