The ways in which Covid-19 is reshaping the hedge fund outsourcing model
Published: 2021-06-30 12:01:40

<p>The Covid-19 pandemic has sparked a more in-depth discussion about the possibility of more business functions being permanently outsourced, particularly among start-up and emerging hedge funds facing budget constraints.</p>
<p>At this week&apos;s fourth annual HedgeweekLIVE North America Emerging Manager summit, speakers discussed how attitudes toward outsourcing &ndash; traditionally the next step on the emerging manager journey following launch &ndash; have shifted dramatically in response to the coronavirus crisis and remote working.</p>
<p>According to Jack Seibald, managing director and global co-head of prime brokerage and outsourced trading at Cowen, the pandemic has accelerated an already significant upward trajectory regarding outsourced trading.</p>
<p>Many temporary solutions, initially motivated by necessity due to homeworking, have developed into exciting opportunities for both managers and service providers, Seibald told the panel.</p>
<p>&quot;It allowed for a more in-depth discussion about whether outsourced trading as a long-term solution would be the best option for them,&quot; he explained. &quot;We observed an acceleration of that process, which is most pronounced among emerging managers.&quot;</p>
<p>&quot;Many of the things that we as an industry believed had to be done in-house, on-site, can now be done remotely,&quot; added Mark Yusko, the managing partner at Morgan Creek, implying that investors no longer view outsourcing as a &quot;dirty word.&quot; He discussed the various outsourcing arrangements that have developed and hybrid models, and other novel approaches adopted by hedge fund firms of all shapes and sizes.</p>
<p>&quot;Twenty years ago, the notion of not doing it yourself was anathema,&quot; Yusko explained. &quot;It was still looked down upon by allocators. However, technology has simplified the process.&quot;</p>
<p>Ben Axler, the founder of Spruce Point Capital, told the panel that the coronavirus pandemic had forced firms to evaluate their competencies, adding that his firm has made a permanent shift to remote work.</p>
<p>&quot;Spruce Point is an activist, forensically intensive, short-selling firm &ndash; that is what we excel at,&quot; he explained. &quot;Anything else on the periphery is not a core competency of ours. We were quick to adopt collaborative tools such as Slack and messaging during the lockdown to continue sharing ideas and fertilizing our research in a less restrictive manner.&quot;</p>
<p>Meanwhile, Jorge Hendrickson, chief revenue officer at Opus Fund Services, observed how outsourcing had helped level the playing field for operational infrastructure, transitioning it away from the concept of &quot;operational alpha&quot; 20 years ago and toward a more checklist-driven exercise.</p>
<p>&quot;This then shifts managers&apos; attention to the investment side of things,&quot; Hendrickson explained.</p>
<p>Yusko continued, &quot;Historically, the cost and size of the team served as a proxy for quality. Physical proximity reigned supreme in the analog world. You needed your employees on-site so you could monitor them and ensure you didn&apos;t have a rogue trader; you needed to ensure no one was engaging in accounting shenanigans.&quot;</p>
<p>Yusko explained that this proxy for quality was dominant in the institutionalized sphere &ndash; but the acceleration of technology has overcome that barrier.</p>