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Exploring Cloud Services: Outsourcing Back Office Ops for Hedge Funds

By Kulvinder Gill,
Thursday, November 3rd, 2011

Earlier this week, we looked at IT Outsourcing with hosted services. In today’s blog post, we will look at the next hot topic discussed at our ‘Exploring Cloud Services for Hedge Funds’ seminar last week in London -- Outsourcing Hedge Fund Middle and Back Office Operations.

Since the financial crisis in 2008, more and more hedge funds are considering outsourcing their middle and back office functions in an effort to reduce costs and gain a competitive advantage.  Let's have a look at some of the questions raised at the seminar:

What are the catalysts for hedge fund managers to outsource their middle and back office operations?

hedge fund outsourcing guidebook

  • Desire to reduce operational risk by performing tasks that were not performed previously (i.e. daily cash reconciliation, collateral management, etc.)

  • Inability to consistently align operations and accounting personnel with levels of trading activity

  • Technology infrastructure and/or personnel that are insufficient to handle current or proposed strategies (i.e. new asset classes or increased trading volume)

  • Opening overseas offices or taking on a global mandate which requires after-hours support

  • Failure or serious questions arising from Investor operational due diligence (ODD) audits that need to be resolved

  • Change in human resources (i.e. departure of personnel), which forces a firm to rethink its model 

What trends are investors seeing in middle and back office outsourcing?

As investors become more demanding from an ODD perspective, the bar has been raised for hedge funds to run an institutional-grade post-trade infrastructure. This fact, coupled with a firm's desire to keep costs down, forces them to reassess their model and makes outsourcing an attractive proposition. 

As firms look to outsource all or part of their operations and accounting functions, they are becoming more creative in the model they select. While the "lift out" model, whereby firms outsource all processes, has historically been popular, they now have more options availalble with compelling ROI metrics.

Tactical outsourcing has therefore been of greater interest. Along these lines, there have also been "hybrid" or "co-sourcing" models in which the organisation has the service provider hire and use some of the their employees to supplement the service provider's team of operations and/or accounting personnel.

What are the benefits that managers have derived from outsourcing their middle and back office operations?

  • Cost reduction is a key benefit.  Many hedge funds migrating to the cloud model from traditional in-house IT services can significantly reduce costs, as firms’ can outsource the infrastructure (processing power, storage, networking or number of users) to a third-party provider rather than purchase a costly in-house infrastructure.

  • Firms have greater flexibility to scale up or down the IT infrastructure depending on the business needs.Reduce Costs

  • Expertise delivered by a third party service provider.

  • The robustness of their operations can be used as a marketing tool and help reduce/eliminate ODD-related issues.  Outsourcing can also provide better operational workflow documentation and assistance with ODD audits.

  • Depending upon the service provider chosen, firms can keep their existing IT infrastructure and just use the personnel of the outsource provider to act as an extension of the firms staff either remotely or on-site.

  • Outsourcing consolidates the firm’s infrastructure relationships to a single vendor, allowing them to focus on day-to-day business needs.

What are some of the concerns that hedge fund managers have expressed with regard to middle and back office outsourcing?

  • Competence

  • Disempowerment

  • Language barrier (depending on where the outsourced provider's staff is located)

  • Concerns that it would be very difficult to bring back in-house services if the firm is not satisfied

  • Concerns over the ongoing viability of their service provider, which would put them in a precarious position if the service provider were to close its doors

  • Investor perception

  • Service level degradation

Be sure to come back on Tuesday for the third and final installment of our seminar recap on exploring cloud services!

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Categorized under: Outsourcing  Trends We're Seeing 



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