Very few managers outsourcing COO role
Very few hedge funds are presently outsourcing the chief operating officer (COO) role, and those that are will struggle to attract institutional money, it has been warned.
Employing an outsourced COO had been mooted at some hedge funds, particularly start-ups over the last 18 months as barriers to entry became ever higher and more expensive. Some start-ups argued appointing an experienced COO on an outsourced basis to oversee operations would be more cost efficient and effective than hiring an individual lacking the required skillsets or expertise.
“Outsourcing the COO is something that hedge funds talked about doing a while ago although it never really materialised,” said Phillip Chapple, managing director at KB Associates, a London-based consultancy.
The challenge for hedge funds utilising an outsourced COO is convincing risk-averse institutional investors there are sufficient operational controls in place. “A number of institutional investors will not invest in a manager which does not have a fully-employed COO as it could be construed as displaying a lack of interest in building a business. If a manager is only interested in running money, then that manager should just join one of the hedge fund platforms instead of setting up on its own” said Ermanno Dal Pont, head of prime services strategic consulting for Europe and Asia at Barclays in London.
Nonetheless, some investors are prepared to give managers leeway on employing an outsourced COO. Funds of funds and family offices, which generally focus their attention towards smaller managers, would be prime examples, but this would probably be contingent on the complexity of the hedge fund’s investment strategy.
“Most investors think you can outsource elements of your operations such as the middle office, IT and legal, for example, as a function of the fund size and the complexity of the strategy adopted. However, you cannot outsource the responsibility of running the business, and that, in essence, is the job of the COO,” advised Dal Pont.
Investors do appear more open to outsourced chief compliance officers (CCOs) with 66% of investor operational due diligence professionals telling a Deutsche Bank survey this was permissible. However, it is expected any outsourced compliance relationship works closely with the COO.