George Ralph, Global Managing Director and CRO at RFA

I speak to a number of new and emerging managers during the course of my working days and recently hosted the first Emerging Managers Knowledge Exchange (EMKx). The event covered a broad range of topics, including regulation, fund domiciles, setting up a fund and key considerations when it comes to selecting outsourced partners.

Following the event, I want to share some reflections and deep dive into a particular growing trend that was discussed:

The rise of emerging managers outsourcing their operations

We have been talking about outsourcing for years, and in 2022 Hedgeweek’s findings that showed approximately 30% of emerging hedge fund managers planned to outsource their functions, which was nearly double the figure of the industry average of 17%. In the last two years, we have seen great evidence amongst our client base of emerging managers outsourcing more and more of their operational IT than perhaps they initially thought they might. I think this is because IT is so complex, ensuring best in class knowledge is so important.

Opting to outsource operations is advantageous for emerging managers for several reasons. These include gaining access to specialised expertise and support for operational technology, accounting, data management, regulatory requirements and cybersecurity strategies. Outsourcing these business functions enables managers to focus on their core offering in relation to investor onboarding, portfolio management and in-house trading activities.

This leads me on to another key takeaway and rising trend from the Knowledge Exchange: The task of outsourcing a COO. Outsourcing this function ensures that the day-to-day operations and administrative functions of the fund can be optimised; it usually isn’t necessary to have this role full time for a start-up. Yet perhaps the most popular reason emerging managers choose to outsource we have witnessed at RFA is because it enables a fund to grow and scale in a highly competitive business landscape.

Having an outsourced provider like us at RFA enables emerging managers to design and build a high quality IT framework that suits their business. An solid framework is advantageous because not only does it enable a fund to grow quickly and efficiently, they can also scale down should they need to. However, the capacity to scale is largely dependent on a fund’s operational structure. Newer managers often have come from spending years at larger funds perfecting their skills, so they bring a wealth of experience with them.

However, besides framework, there are other key considerations a fund should consider when it comes to outsourcing IT and operations. These include:

• Vendor Selection – Funds should do their research. Selecting an outsourced partner is instrumental to a fund’s overall success. Companies should be considering whether a provider is a good cultural fit, their reputation, experience and expertise. It is also important to consider the manpower behind an outsourced provider and understand where their resources lie and their level of capabilities.
• Data Security – Within the finance sector, we know data security is paramount. When selecting a partner, funds should seek to understand the provider’s own compliance and data security protocols to ensure that it corresponds with industry standards.
• Risk Mitigation – Working with an outsourced provider also presents funds with certain risks. Not only are these risks apparent in a digital sense, funds also need to assume the risk of their provider themselves. A fund should therefore carry out a risk management profile against a potential vendor and identify any potential vulnerabilities and how best to mitigate against them.
• Tracking Performance – Scalability and growth is a key priority for funds. Being able to track and monitor performance of an outsourced provider will determine how well a provider is supporting a fund’s overall business goals. Establishing feedback loops and reviews should be put into place to allow for continuous improvement.

I have years of experience supporting emerging funds with their business needs, supporting their capacity to scale and journey to growth. If you would like to talk more about how we can best support you, feel free to reach out.