There are core functions and scenarios hedge fund managers should absolutely never outsource. As the CEO of a firm whose business model is to provide outsourced solutions to hedge funds, it may seem like a bizarre statement to make. However, it is true. Let’s examine a few of the key instances in which this rings true.
- A hedge fund is paid by its investors to grow their money. Therefore, the core asset management functions of making investment decisions and managing risk should never be outsourced.
- If a fund’s culture is inherently controlling and leadership will replicate any outsourced solution in-house, other than for redundancy, it does not make sense to outsource.
- Investors trust that a fund will build the right organization to support investment prowess. Accordingly, all oversight and fiduciary functions (COO, CFO, CTO, CRO etc.) should not be outsourced.
- The relationships between funds and their clients lead to innovation in product development and structure, and it is in the fund’s best interest to stay close to these key investors. Therefore, creating and cultivating client relationships should not be outsourced.
Now let me be equally bold and say, outsource everything else. Why? Your investors are outsourcing the alpha function to you, so shouldn’t this be your main priority? In fact, focusing on core alpha generating functions is necessary for great performance, so you can’t afford to spend your time elsewhere. There are organizations that can partner with you to create world-class business operations in which you do not lose control or the ability to customize.
What exactly should a fund outsource? Anything that another organization can do better. Operations and technology related items including shadow functions, reporting, and core tools to manage data and enable reporting should be taken over by outside experts. Many funds are now not only looking for horizontal outsourcing (of an entire function such as reconciliation or compliance), but also vertical outsourcing, where the oversight and management are kept in-house, while the fund leverages the technology and staff of its outsourcing partner. Additionally, outsourcing provides funds access to new ways of thinking. If funds collaborate with organizations that have a good pulse of the industry, they will be introduced to ideas they would have otherwise missed.
Why is outsourcing the aforementioned functions beneficial to hedge funds?
1. Better Quality: There are outsourcing firms that solve the operations and technology scale issues for many funds – and that is all that they do. These firms are specialized and will deliver results superior to doing the same, in-house.
2. Agility: As asset classes, investor and regulatory needs change, outsourcing providers create agility and flexibility to hedge funds.
3. Cost-Effectiveness: In most cases, outsourcing is more cost-effective than doing it in-house.
The moral of the story is you can’t possibly do everything on your own and do it well. So, embrace outsourcing strategically and build strong partnerships!