Divisions over use of outsourced COOs, according to COOConnect poll

Categories: 
InvestorsOperational RiskOutsourcing
08 Mar, 2012

Outsourcing the chief operating officer (COO) functionality at hedge funds appears to be divisive, according to a new poll by COOConnect.

Approximately 41% believe outsourcing the COO role is unacceptable as it displays a disregard for operational risk and lacking commitment. Jeremy Siegel, global head of prime consulting at Credit Suisse, subscribes to this view.

“Outsourcing certain functions can help manage the cost base.  However outsourcing the CFO or COO role can be a stumbling block for many investors. A vital criterion for an investor conducting due diligence is the quality of the operations and infrastructure, where the CFO or COO can be central. Outsourcing this function may be interpreted as a lack of commitment to the non-investment side of the business,” he said.

While middle and back office outsourcing is commonplace, there is a growing trend for smaller hedge funds low on capital, to farm out the COO role, particularly in the face of downward pressure on fees. While the majority of these subcontracted COOs do not have a full-time office role, they generally adopt a “hands on” approach. Most will also have senior management expertise at alternatives.

Some 19% believe it is perfectly okay to utilise an outsourced COO in a start-up – interestingly, 4% say it is fine regardless of AuM. One operational due diligence head acknowledged start-ups do not always have the experience or resources to hire a suitable COO therefore it is perfectly acceptable to leverage the skills and expertise of an outsourced COO.

Numerous start-ups or emerging firms are bearing the brunt of intrusive regulations stemming from both the US and European Union (EU) and increasingly stringent institutional investor demands. Managers are bracing themselves for an array of rules including Dodd Frank, over-the-counter derivatives reforms, the Alternative Investment Fund Managers Directive (AIFMD), the European Markets Infrastructure Regulation (EMIR) and the Foreign Account Tax Compliance Act (FATCA). Such legislation might therefore force more hedge funds to outsource their COOs to curb costs.

Outsourcing the chief operating officer (COO) functionality at hedge funds appears to be divisive, according to a new poll by COOConnect.

Approximately 41% believe outsourcing the COO role is unacceptable as it displays a disregard for operational risk and lacking commitment. Jeremy Siegel, global head of prime consulting at Credit Suisse, subscribes to this view.

“Outsourcing certain functions can help manage the cost base.  However outsourcing the CFO or COO role can be a stumbling block for many investors. A vital criterion for an investor conducting due diligence is the quality of the operations and infrastructure, where the CFO or COO can be central. Outsourcing this function may be interpreted as a lack of commitment to the non-investment side of the business,” he said.

While middle and back office outsourcing is commonplace, there is a growing trend for smaller hedge funds low on capital, to farm out the COO role, particularly in the face of downward pressure on fees. While the majority of these subcontracted COOs do not have a full-time office role, they generally adopt a “hands on” approach. Most will also have senior management expertise at alternatives.

Some 19% believe it is perfectly okay to utilise an outsourced COO in a start-up – interestingly, 4% say it is fine regardless of AuM. One operational due diligence head acknowledged start-ups do not always have the experience or resources to hire a suitable COO therefore it is perfectly acceptable to leverage the skills and expertise of an outsourced COO.

Numerous start-ups or emerging firms are bearing the brunt of intrusive regulations stemming from both the US and European Union (EU) and increasingly stringent institutional investor demands. Managers are bracing themselves for an array of rules including Dodd Frank, over-the-counter derivatives reforms, the Alternative Investment Fund Managers Directive (AIFMD), the European Markets Infrastructure Regulation (EMIR) and the Foreign Account Tax Compliance Act (FATCA). Such legislation might therefore force more hedge funds to outsource their COOs to curb costs.

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