DEV Community

Cover image for The ways in which Covid-19 is reshaping the hedge fund outsourcing model
Le Truong
Le Truong

Posted on

The ways in which Covid-19 is reshaping the hedge fund outsourcing model

The Covid-19 pandemic has sparked a more in-depth discussion about the possibility of more business functions being permanently outsourced, particularly among start-up and emerging hedge funds facing budget constraints.

At this week's fourth annual HedgeweekLIVE North America Emerging Manager summit, speakers discussed how attitudes toward outsourcing – traditionally the next step on the emerging manager journey following launch – have shifted dramatically in response to the coronavirus crisis and remote working.

According to Jack Seibald, managing director and global co-head of prime brokerage and outsourced trading at Cowen, the pandemic has accelerated an already significant upward trajectory regarding outsourced trading.

Many temporary solutions, initially motivated by necessity due to homeworking, have developed into exciting opportunities for both managers and service providers, Seibald told the panel.

"It allowed for a more in-depth discussion about whether outsourced trading as a long-term solution would be the best option for them," he explained. "We observed an acceleration of that process, which is most pronounced among emerging managers."

"Many of the things that we as an industry believed had to be done in-house, on-site, can now be done remotely," added Mark Yusko, the managing partner at Morgan Creek, implying that investors no longer view outsourcing as a "dirty word." He discussed the various outsourcing arrangements that have developed and hybrid models, and other novel approaches adopted by hedge fund firms of all shapes and sizes.

"Twenty years ago, the notion of not doing it yourself was anathema," Yusko explained. "It was still looked down upon by allocators. However, technology has simplified the process."

Ben Axler, the founder of Spruce Point Capital, told the panel that the coronavirus pandemic had forced firms to evaluate their competencies, adding that his firm has made a permanent shift to remote work.

"Spruce Point is an activist, forensically intensive, short-selling firm – that is what we excel at," he explained. "Anything else on the periphery is not a core competency of ours. We were quick to adopt collaborative tools such as Slack and messaging during the lockdown to continue sharing ideas and fertilizing our research in a less restrictive manner."

Meanwhile, Jorge Hendrickson, chief revenue officer at Opus Fund Services, observed how outsourcing had helped level the playing field for operational infrastructure, transitioning it away from the concept of "operational alpha" 20 years ago and toward a more checklist-driven exercise.

"This then shifts managers' attention to the investment side of things," Hendrickson explained.

Yusko continued, "Historically, the cost and size of the team served as a proxy for quality. Physical proximity reigned supreme in the analog world. You needed your employees on-site so you could monitor them and ensure you didn't have a rogue trader; you needed to ensure no one was engaging in accounting shenanigans."

Yusko explained that this proxy for quality was dominant in the institutionalized sphere – but the acceleration of technology has overcome that barrier.

Top comments (0)