Managers warned on complacency when outsourcing
Hedge funds need to perform better oversight when outsourcing middle and back office functionalities to service providers, it has been warned.
“I am a firm proponent of outsourcing butI fear there is a tendency to over-outsource and I am concerned that oversight may be taking a back seat at a fund level. To ensure outsourcing is done well, there needs to be quality oversight,” said Lou Sala, partner at WTP Advisors, a New York-based consultancy.
There has been a spate of outsourcing since 2008 as hedge funds seek to trim overhead costs. In November 2011, it was revealed that Bridgewater Associates, the $120 billion hedge fund giant, announced it was outsourcing all of its middle and back office staff to BNY Mellon.
“When outsourcing entire divisions, there still needs to be a semblance of internal infrastructure. You must look to retain some employees to ensure consistency of checks and balances with an eye towards ensuring a sound internal control environment,” commented Sala.
Investors have become very tough and will pull capital out of a hedge fund if it suspects there is lacking oversight of outsourcing. “Investors have incredibly rigorous operational due diligence requirements nowadays and they focus heavily on service providers. While investors want cost efficiency, it cannot be at the expense of inadequate controls,” added Sala.