Bespoke solutions break mould in administration
After remaining static for many years, the alternative fund administration model is changing. As many hedge funds face fee compression, they are seeking to reduce costs by turning to bespoke forms of outsourcing.
Since the beginning of alternative investments 50 years ago, fund administration has had two basic models: either the manager has opted for full outsourcing or for the standard model, which involves manager and administrator running dual books and records. In the latter case, the fund manager benefits from keeping control of books and records but they are also verified externally.
But over the past five years, managers have started to dilute the standard model by outsourcing some areas but keeping control of others. With profitability under pressure, the number of managers choosing this form of bespoke outsourcing is growing and looks set to increase still further.
There is good reason for this. Under the standard model there are dual books and records – run by two separate teams with two different accounting systems. Selective outsourcing not only cuts costs through eliminating duplication but also provides access to best-in-class systems and expert people.
Large managers used standard model
Typically, it is large hedge fund managers specialising in complex investment strategies, such as credit and multi-strategy, that have used the standard model. They have opted for the dual books and records approach in order to keep control of critical tasks, including middle and back office processing.
By contrast, smaller hedge fund managers and those specialising in long-short equity and other less complex strategies have tended to opt for full outsourcing.
But now fee compression is encouraging large managers to look into bespoke outsourcing, also known as the ‘administrator co-sourced model’. They are openly discussing it as they seek to make their businesses
Recently, several of Citco’s large clients – which between them pursue a wide of range of strategies, including global macro, multi-strategy, fixed income, private equity and real estate – have opted for a bespoke model. Most commonly, the areas they choose to outsource include investor transparency reporting, regulatory reporting, risk reporting, tax services and treasury/collateral management.
Moving to an outsourced solution
How do fund managers decide what to outsource? Typically, they work with Citco’s client solutions team to identify their ‘pain points’. Generally, they will select one or two areas to outsource. Every manager has a different infrastructure and staffing, so the solution will always be different. However, the outcome is typically more efficient and scalable.
By selectively outsourcing in this way, managers are cutting back on duplication and cost while keeping control of key areas and gaining from Citco’s scalability. We expect more managers to adopt bespoke outsourcing. It is a new model that is breaking the traditional fund administration mould.