Is Your Firm a Good Candidate for Hedge Fund Back-Office Outsourcing?

Many hedge funds are seeing big returns from outsourcing their back office, reconciliation, reporting and compliance functions. This article describes how to tell if outsourcing makes sense for your company.

The fundamental reason to outsource all or part of your back-office operations is to allow you and your key team to focus on those areas where you truly shine: serving the client.

Since COVID-19, outsourcing has only become more popular among hedge funds.

Outsourcing isn’t a panacea, but it can have a positive impact on your ability to improve both your operations and client support.

And according to KPMG and AIMA’s annual Global Hedge Fund Survey, 71% of hedge funds surveyed thought they could achieve better cost efficiency if they outsourced certain operations.

Considering Hedge Fund Outsourcing: Questions to Ask

1. How big is your investment firm?

Outsourcing can have a significant positive impact on large firms, but small-to-medium sized firms (up to 12 or so employees working in operations) tend to have the greatest immediate return.

These firms tend to have people who are already stretched thin, often working in areas in which they are less familiar or where they don’t have high levels of competence. In general, you will see the greatest ROI in firms with the fewest number of operational team members.

2. Is your firm growing quickly?

If you are growing as a company and/or your performance is hot, that might make you a great candidate.

Outsourcing all or part of your back-office operations can deliver instant additional capacity and better controls around your growth. Outsourcing also avoids redundancy of staff and frees you to focus on client support and areas that effect your firm’s profitable growth.

3. Are there errors in your reports or with your reconciliation breaks?

Accuracy is essential in successfully supporting financial services clients. If you are finding that key items are missed in client reports or if breaks are causing trading errors, it is likely a sign that you may not have adequate controls in place.

This is often due to staff members wearing too many hats or working in areas outside their strengths. It is difficult to invest the requisite amounts to build a world-class operation. Giving this work to specialists can improve the quality of the reporting while freeing people to spend more time with clients.

4. As part of your hedge fund back office, are you doing a lot of manual and repetitive work?

In addition to outsourcing, there are opportunities to automate. If you're doing work out of Excel and manually compiling data into reports, you can leverage bots for those tasks. We help hedge funds automate those processes.

By automating, you and your staff can spend more time on higher-value functions that generate revenue, rather than focus on those that consume revenue.

5. Do you want a more remote work setup?

The pandemic showed how important flexibility is, in terms of where and how you work.

By outsourcing, not only can you offload desired tasks to third parties, but the third parties can help you upgrade your technology and simplify your tech stack, like Empaxis does.

The right provider can help you move away from legacy systems on to modern, cloud-based systems.

What that means is you don't need to be physically present in an office to use a specific physical device to get work done. With a cloud-based setup and remote team, you can work from anywhere.

6. Are you having a tough time retaining your people?

This might be a sign you have people not receiving the opportunities they are seeking in investment management.

Due to the small size of the firm, you will find people working in the reporting, reconciliation, and operations areas when their intent was to be an analyst or portfolio manager.

By delegating these operational roles to a quality outsourcing firm, your future hires will be more aligned with your business and you will retain your people longer.

Further, outsourcing needn’t be an all-or-nothing proposition. Depending on your firm’s current needs, you can choose to engage a provider for only a portion of the operation.

In one instance, a firm we worked with lost two of their five-member operational team in the same week.

They were not looking to outsource anything, but by engaging us, were able to quickly back-fill the employees who left the organization. We have been working with them for about 10 years. They don’t need us to do all of the work, but they like the security of knowing that we can ramp up at any time.

7. Finally, are you at risk of the "Key Person" syndrome?

Is much of the information critical to running operations of the business concentrated in the hands of a one or two people? This leaves you with a lot of risk if that person leaves or is out of action for a substantial period.

Partnering with a strong operations outsourcer assures you that the processing knowledge critical for your firm does not walk out the door when an employee leaves you.

Multiple people will be able to step in to take over seamlessly, processes will be documented and controls will be in place to ensure consistent processing regardless of turnover.

Outsourcing all or part of your hedge fund's back-office functions offers the potential to both improve the quality of your firm’s operations and also to support the growth and scalability of your business.

If some or all of the questions above describe your firm, it could be worthwhile scheduling a conversation with one or more of the strong providers in the outsourcing space.