We recently released a report with Hedgeweek, where we explore the results of Hedgeweek’s Q2 Hedge Fund Manager Survey conducted in May 2023. In the survey were 80 hedge fund firms, with 68 respondents sharing their sentiments toward outsourcing. While the initial pace of outsourcing uptake in the hedge fund industry was slow, trust has grown and firms are outsourcing more and more of their operations. We’ve discussed previously the driving forces behind the increase in hedge fund outsourcing, but are there commonalities in the types of functions that hedge fund firms are choosing to outsource?
Most hedge fund firms began their outsourcing journey in the back office. This trend has reached a point where, on average, 60% of hedge fund firms outsource half or more of their back-office functions. The success realized in the back office prompted managers to expand their outsourcing and lift-outs to the middle office and towards the trading desk. Within this movement, our survey with Hedgeweek revealed some interesting nuances among subgroups. For instance, hybrid managers are more likely than systematic or discretionary managers to outsource a majority of both their middle and back-office functions. Regional subgroups also show some differences, with Asia-based fund managers being far more likely to outsource a majority of middle-office functions than managers based in North America.
Looking at the trajectory of specific functions being outsourced, P&L and NAV in the middle office are most likely to be outsourced, followed by trade settlement and trade clearing in the back office. Trade matching was the function that the highest proportion of respondents said they may outsource in the future.
Alongside the trend of outsourcing specific functions is the growing trend of lift-outs, where an entire team is moved onto the systems of a third party. For the middle office, the functions most likely to be subject to a lift-out include trade affirmation, confirmation, reconciliations and collateral management. Whether choosing to outsource or lift-out, the trend allows hedge funds to find a balance between investing in infrastructure and focusing on investing.