Outsourcing set to be integral for the next generation of US emerging managers

Hedgeweek recently shared a report titled ‘The Next Generation: How emerging managers are responding to the new hedge fund landscape’. The report includes a key chapter that explores the hedge fund landscape in the US, where the manager market is evolving at pace. The overall picture of the US landscape is that startup and emerging hedge funds are performing well, despite the industry being inundated with challenges. Yet, a key insight reported by Hedgeweek witnesses an increase of emerging hedge fund firms seeking outsourced support in order to help them thrive in the current financial climate. This particular trend showcases a cultural shift within emerging hedge funds within the US market.

According to Hedgeweek, 33% of emerging hedge fund managers are planning to outsource their functions to specialist firms across technology, compliance and regulation. This figure contrasts the current industry average of 17%. In addition to these statistics, Hedgeweek has reported that emerging managers are outperforming existing firms that have been long well established. A driving motivation noted amongst emerging managers for this decision is that emerging managers are seeking to reap in the benefits of the opportunity presented to them by time spent on alpha generation. For me, this makes total sense. We all have specialist areas in which we excel, so making use of those skills is an imperative part of how to run a successful business.

The pandemic was of course a key accelerator for this trend in the US due to the rapid adoption of outsourced digitised services. The report cited how different the hedge fund climate is today in comparison to ten years ago. A decade before, the US hedge fund industry used to be ‘two people and a Bloomberg terminal’. Yet those days are now over. The Hedgeweek US Emerging Managers Summit that was held back in June reported that the current US trading environment is one that is rife with both market volatility and opportunities. Now emerging managers are looking to focus entirely on portfolio management and trading activity in house and then outsource their other business functions to third-party service providers that can ensure expert care and specialist attention can be applied to their technology, cybersecurity, regulatory functions and other operations.

Today’s cybersecurity in particular has never been more essential to the health of hedge fund. Without it, firms simply would not be able to operate. The level of cyber risk that firms are confronted with in 2022 has never been greater or as constant. Outsourcing to a specialist provider such as RFA means that hedge funds can truly focus on their day to day running of portfolio management and trading activity without the worry of managing cybersecurity risks.

Outsourcing managed cybersecurity services is advantageous to emerging hedge funds because they gain the expertise of an entire business of experts dedicated to helping them with their business. Often, the cause of cybersecurity attacks are a result of human error. This is especially true of firms that have not taken the time to train their staff in hygienic cybersecurity practices. By outsourcing to a firm such as RFA, firms gain the benefits of having a true expert managing their technological support and cyber defence. According to Hedgeweek, firms who embrace the opportunity of outsourcing to third-party suppliers when it comes to business functions beyond trading and portfolio management, are reaping the most rewards in terms of performance. It has never been more timely for hedge funds to embrace the culture of outsourcing and working more collaboratively with experts.