What are the typical IT and BPO processes that hedge funds outsource?
Hedge funds are looking to outsource some or all of their IT and telecom services.
These funds typically evolve from larger firms with large IT resources. Consequently most of the founders of hedge funds did not have to be concerned with technology and management. Also the economics of a new business suggest it is not cost-effective or mandatory to staff the necessary skills to design and support their own infrastructure and IT tasks.
Is outsourcing of services by hedge funds a relatively new trend? What is compelling them to outsource?
Outsourcing is a big trend in the financial services market in general, from small to large firms. Hedge funds are most commonly seeking the same or better level of service that they have received in previous environments, and seek improved business processes so that they have a more streamlined and efficient trading environment. In some cases hedge funds were dissatisfied with the responsiveness of their prior services and are looking for better levels of service to ensure a competitive advantage.
Hedge funds now have the opportunity to define their own service levels. In the past, they usually received a bundle of services for a set fee from prime brokers. Now, hedge funds can choose what services they want and don’t need to pay for services they don’t need or will not use.
Given the mystery around hedge funds, and uncertain regulation and compliance they operate under, how do their outsourced service providers provide them quality service?
There are service levels that are dictated by the market and client expectations, and there are regulatory standards that obviously need to be met too. Because trading transactions are now completed electronically, a hedge fund’s network speed must be real-time. Any delay in completing a transaction may result in the cost of the transaction to increase. Every hedge fund is trying to find a way to access information and complete their transactions quicker.
Redundancy is a subset of reliability. The key is to have no single point of failure throughout the entire process. This redundancy will then increase the overall reliability of the solution. Adequate security assures that the existing reliability remains. Additionally, the security measures must protect the hedge fund’s client information, its proprietary investment positions, and also meet Security and Exchange Commission requirements.
Data security is a risk when financial services outsource to third parties. Is this a bigger risk for hedge funds?
Service providers who are experienced, proven and have systems in place internally can provide a far more secure and effective network environment quicker, and more efficiently than hedge funds could build without disruption to service or operations. The risk for any financial institution is great, and the need to thoroughly protect its proprietary and client information is paramount.
Transaction speed is balanced against the level of security that is required, the communication link to the prime broker and the additional cost of enhancing the network to be as close to real time as possible. There is an additional cost to acquiring a bigger communications pipe and increasing the power of your network resources. Ultimately, it will be decided by the additional costs incurred by the hedge fund due to delay in completing transactions verses the cost of improving the network resources.
Customer support may be the single most important issue in selecting a technology provider. After the infrastructure is built, customer support helps you use and manage that technology over the next two to five years. Hedge funds should seek a vendor whose support personnel has specific knowledge of how the technology is used in the industry and provides the level of support required by the hedge fund (response time, supports all technologies deployed and hours of support) and related technology services (i.e., application development or web site development) that may be needed. Ideally, a hedge fund wants one number to call for their technology needs.
