Hedge Fund Outsourcing is Expanding

August 8, 2011

Many hedge funds are now turning to outsourcing for more mission-critical aspects of their business, rather than simply as a way to offload non-essential tasks.

That’s the view of Alberto Corvo, a managing principal of the financial services division at eClerx Services Limited, a capital markets and investment management consulting and outsourcing company. Corvo recently contributed an article on the subject to Advanced Trading.

Corvo says outsourcing has entered a new phase of its evolution. Hedge funds are no longer looking at outsourcing as a way to offload non-core activities and cut costs. Funds can now outsource key aspects of their investment management processes, and outside suppliers are stepping up to provide solutions to meet this demand.

For example, outsourcing firms now offer Front Office Support in the form of trade capture, broker recap review, and trade enrichment. Middle Office outsourced functions might include trade booking, broker/blotter reconciliation, internal system reconciliation and third-party reconciliation, trade investigation and more.

This complements the Back Office Support systems that have traditionally been provided by outsourcers, such as settlement, portfolio reconciliation and resolution, collateral and cash management.

Outsourcing trading operations, says Corvo, enable hedge funds to focus on their core competencies, while being supported by timely and accurate information and latest hedge fund trading technology (without necessarily having to invest in that technology themselves).

So how does one choose which functions to outsource and which vendors to hire? Many factors influence the decision. Are the processes you use now delivering the quality and cutting-edge solutions you need, or is it time to upgrade? Does the process need to be available continuously, or is it subject to fluctuations? What levels of data security are required?

Offloading strategically important functions to suppliers who offer industry-leading solutions can also help smaller hedge funds “level the playing field” against their larger competitors. Smaller hedge funds can implement more sophisticated risk controls and transparency using outsourced processes, and therefore be able to attract demanding institutional investors

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