What does it take to start a hedge fund? And, what functions should a firm outsource in order to prioritize higher level work? The HFM US Operational Leaders’ Summit 2020, held earlier this month, addressed these questions with a focus on addressing operational issues facing the emerging managers. Emerging managers are considered those North American funds under $1b AUM and according to Hedge Fund Research, there were 391 hedge funds launched through the third quarter of 2019. [1]
SS&C Advent participated in the Start Me Up: Outsourcing panel, where contributors explored how emerging hedge funds can utilize outsourcing, thoughts around incorporating Operational Due Diligence (ODD) shops in the process, as well as overall considerations for electing service providers. When assessing outsourcing options, it is vital for these emerging managers to understand that outsourcing does not let the firm “off the hook,” or permit them to give up responsibility or ownership in terms of management and oversight. Outsourcing requires managers to maintain a level of control and governance of their partners, particularly when answering to investors and due diligence requirements.
For emerging mangers evaluating outsourcing options for the back office, it is essential to include ODD shops as part of the process, mentioned one panelist, as they are experts in the space and their perspective is invaluable. Moreover, partnering with an outsourcing vendor that is keenly aware of regulatory requirements and changes can save a lot of frustration for a smaller fund. Other areas for emerging managers to consider when evaluating providers is the ability to co-source, as well as the flexibility to bring certain functions back in-house, as needed. Lastly and equally as important, the more technical items to consider are options around middle and back office functions: trade uploads, asset servicing, data governance, reconciliation, as well as the ability to outsource other functions, such as trading.
Panelists also commented on the importance of choosing and evaluating the day-to-day team when electing outsourcing services. While outsourcing can soften the burden and alleviate day-to-day duties, responsibility still lies with the fund and management. Therefore choosing an outsourcing team that you feel both confident and comfortable with is critical. References can be your best friend in this regard. One panelists discussed making 17 reference calls, and that he was very clear with the provider around the specific service team he wanted on his account. Additionally, having a clear understanding of the outsourcing team’s ability to function with unforeseen turnover is a key preventative measure that should be considered in the evaluation process.
The event and panels provided educational insights for back office professionals and a great deal of actionable advice for emerging managers to consider when assessing vendors and the capabilities available. For those evaluating the various outsourcing operational services available, learn more about Geneva for Emerging Managers.
[1] Whyte, A. Things May Be Looking Up for Hedge Funds. Institutional Investor. January 15, 2020. https://www.institutionalinvestor.com/article/b1jxf8lmqxl597/Things-May-Be-Looking-Up-for-Hedge-Funds
