Prepare for sustained success with outsourcing services partnerships that provide the
ability to adapt, scale, and manage unforeseen capacity and continuity challenges
In my day-to-day contact with the funds industry, I often feel like hedge fund managers tend to view their business like a long-call option. In other words, they invest a fixed amount into the business, and then once the fund grows and the strategy is executed, they intend to successfully unlock unlimited payoff with limited downside.
While this outcome is certainly possible, hedge funds, unlike the financial instruments they invest in, are living, breathing businesses that operate in the real world. Like all other businesses, they are vulnerable to business risks. If these risks are not carefully managed, the downside is unlimited, and could take the manager to zero.
Outsourcing is a great way to manage business risk. It is cost-effective, readily available, and allows hedge fund businesses to focus on their comparative advantage – investing – while leaving other essential day-to-day tasks to vendors that offer economies of scale, knowledge, and technology.
Two broad categories of business risk that outsourcing can help hedge funds address are capacity risk and continuity risk (including key person risk).
Capacity risk: avoid missed opportunities by building in the ability to scale
Capacity risk refers to the potential for a hedge fund to be unable to meet the growth demands of its business due to a lack of (internal) resources, capacity, or know-how. Outsourcing can help firms mitigate this risk by allowing a hedge fund to tap into the scalable resources of an external provider. For example, Hedge Fund A has recently secured interest from several existing investors to launch a second strategy; however, Fund A’s operations are already understaffed. Hiring more talent is not an option, as new staff members will take months to train. Plus, in a tight labor market, new staff are hard to find, train, and retain in the first place.
To address this scalability challenge, Hedge Fund A can opt to increase its capacity and outsource parts of its daily work – such as trade processing and reconciliation – to a third party. This shift can free up existing internal resources while ensuring that operations can scale freely with future demand.
Explore our front, middle, and back office outsourcing solutions for
Asia Pacific Asset Managers.
Continuity risk: don’t be caught off guard by staff turnover or other unforeseen events
Continuity risk refers to the potential for a hedge fund to be unable to continue operations due to unforeseen events, such as employee turnover. Once again, outsourcing can help hedge funds mitigate against this risk by providing access to the continuity planning of an external provider. For example, Hedge Fund B is a mid-sized fund with a particular way of measuring and reporting risk on its portfolio. Fund B’s internal risk team staff member hands in their notice, creating a panic. Not only is the fund’s strategy unique, but now there will be a gap between the staff member’s leaving date and the time it takes for Fund B to find and train a new resource. Had Fund B utilized the outsourcing services of a third party, they would not have faced this key person risk scenario. Thus, the utilization of outsourcing can ensure the continuity of the fund’s operations in the event of an unforeseen disruption.
Choosing a reliable outsourcing partner
It is important to keep in mind that outsourcing also brings its own set of risks, including control and communication risk. Thus, in my experience, hedge funds should perform a thorough due diligence on potential vendors, have a well-structured contract with clearly defined goals and tasks in place, and ensure open and frequent two-way dialogue with their chosen outsourcing partner.
In conclusion, outsourcing can be an effective way for hedge funds to manage business risk by addressing capacity and continuity risks. It can provide hedge funds with access to specialized expertise and technology, building capacity and continuity by providing support day in, day out, while also reducing costs and improving operational efficiency. However, it is important to weigh potential benefits against potential risks and conduct thorough due diligence on any outsourcing partners.
Contact Linedata to open a conversation about how our outsourcing solutions for Asia Pacific fund managers can help you mitigate capacity and continuity risk while supporting your business objectives.
About the author, Matthew Jarvis
Matthew Jarvis manages the sales and marketing function for Linedata Global Services in Hong Kong. He has a solid understanding and extensive relationships throughout the hedge fund industry in Asia-Pacific, working with hedge funds, hedge fund investors, and other hedge fund service providers.