Pershing, a BNY Mellon company, and Aite Group, a research and advisory firm, have published a new whitepaper. It examines hedge fund operations and provides managers with practices and a systematic framework for helping them select and manage relationships with third-party outsourcing solution providers.
Reportedly, the whitepaper entitled “Fueling Growth: Outsourcing Solutions for Hedge Funds” is available through Pershing Prime Services and BNY Mellon Alternative Investment Services.
According to BNY Mellon, the key findings from the white paper include: Choosing the proper outsourcing model – A majority of hedge funds have favored the approach of implementing a hybrid outsourcing model because it provides them with operational flexibility to meet short-term goals using third-party service providers for some key functions, while allowing the firm to develop internal capabilities for long-term expansion;
Smaller hedge funds challenged by resource restrictions – The hedge fund market is dominated by small- and mid-size funds, many of whom lack expertise in specific functions and have limited resources. These funds often opt to outsource a significant portion of their functions to third-party solution providers and to their prime broker. Smaller hedge funds should also consider outsourcing essential business functions including legal, accounting, administrative and back-office-related tasks, such as clearing and trade reconciliations;
The role of the prime broker – Most prime brokers have seasoned internal consulting teams who have relationships with array of service providers–such as law firms, real estate agencies, recruiting firms and software vendors–and can facilitate introductions with various vendors who can potentially meet the needs of the hedge fund. Hedge funds should consider seeking out their prime broker’s counsel before establishing a new relationship with a third-party firm; and
Consider disaster and recovery planning in vendor selection – The stability of a third-party solution provider should be an important consideration for hedge funds as it relates to their disaster and recovery planning. As hedge funds rely more heavily on outsourced services, they should execute proper due diligence on a vendor’s financial viability, technology capabilities, contingency around business continuity and disaster recovery, management and customer service.
Craig Messinger, managing director of Pershing Prime Services, said: “It is important for hedge funds to develop a thoughtful, long-term outsourcing strategy to ensure that its needs for support during various stages of the fund’s life cycle are closely aligned with its goals and objectives to serve investors well. Employing this type of approach will enable hedge fund managers to focus on generating profitable returns for their clients and help them grow their businesses in a more productive manner.”
Sang Lee, managing partner at Aite Group, said: “Substantial benefits exist for hedge funds that develop strong outsourcing relationships across their businesses. However, selecting the right vendor relationship is a complex process. It is critical that fund managers develop a thorough process to understand their own needs as well as evaluate vendor relationships for cultural fit and long-term continuity.”
