The financial landscape is constantly evolving, presenting asset managers with a wide range of complex decisions regarding technology, operational efficiency, regulation, and more. In a roundtable discussion featuring chief operating officers (COOs) from Nordic hedge funds and asset managers, along with service providers Enfusion, MSCI, and IG Prime, HedgeNordic addresses some of these questions and explores how asset managers are working to stay ahead in a rapidly transforming industry.
One of the strategic decisions facing asset managers is finding the right balance between outsourcing and insourcing different functions. Andi Woolass, EMEA Head of Partnerships at Enfusion and moderator of the discussion, highlights that this decision involves multiple considerations, such as outsourcing the trading function versus having an in-house desk or outsourcing middle-office functions to minimize the need for multiple full-time equivalents (FTEs), among others. Ultimately, the decision between insourcing and outsourcing is crucial for enhancing operational efficiency and ensuring regulatory compliance, which significantly influences an asset manager’s competitiveness, scalability, and cost-effectiveness.
Daniel Mackey, Chief Operating Officer of stock-picking fund boutique Protean Funds Scandinavia, believes that most boutique asset managers in the Nordics “don’t aspire to grow to a scale where insourcing many functions makes practical sense, whether during the startup phase or even after achieving scale.” From Mackey’s perspective, outsourcing allows managers to “maintain cost flexibility as they grow or seek to sustain that scale.” He emphasizes that “outsourcing where possible makes sense, enabling managers to stay lean, flexible, and focus on what we do best – creating value for investors.”
“Outsourcing where possible makes sense, enabling managers to stay lean, flexible, and focus on what we do best – creating value for investors.”
Daniel Mackey, Chief Operating Officer at Protean Funds Scandinavia.
The team at systematic investment manager Volt Capital Management are “strong believers in outsourcing,” according to Chief Investment Officer Patrik Säfvenblad. “We aim to outsource as much as possible, and eight years into the history of Volt, we have gradually expanded the range of functions we outsource,” says Säfvenblad. One of the areas the Volt team outsourced was fund administration, followed by risk management, and more recently, Information Technology (IT). “Outsourcing IT infrastructure and related services has been a very positive move, freeing up time for our team. We plan to continue down this path, looking for more functions to outsource,” Säfvenblad adds. Beyond cost benefits, he highlights another key benefit of outsourcing – flexibility. “It’s far easier to replace the fund administrator than to lay off your internal team. Especially when your organization is under stress, outsourcing offers much greater flexibility in how you manage operations.”
“Especially when your organization is under stress, outsourcing offers much greater flexibility in how you manage operations.”
Patrik Säfvenblad, Chief Investment Officer at Volt Capital Management.
Martin Rudling, Chief Operating Officer at fund boutique Proxy P Management, offers a more philosophical perspective, stating that “if we look upon this subject holistically, we all have to outsource.” He likens fund management firms to car manufacturers, explaining that “from an outsider’s perspective, we are seen as a single entity – like a BMW car that uses brakes from Bosch and various other components from different suppliers.” Rudling believes there are many functions and components that can be effectively outsourced, allowing firms to “distance themselves from potential issues.” He acknowledges that while “as a manager, it can be reassuring to detach from certain challenges, it’s essential to remember that outsiders, including investors, perceive us as a unified whole.” Therefore, he emphasizes the importance of collaboration with outsourcing partners. “The full responsibility ultimately rests with us. Regardless of how your operations are organized, we appear as a singular entity.”
Richard Fenton, responsible for Prime Brokerage Sales at IG Prime, notes that this outsourcing trend extends beyond the Nordics saying that “For an emerging manager who hasn’t spun out of a large firm with an established track record, the primary focus is on building that track record.” Managers with under $50 million in assets are often inclined to outsource many functions, particularly in the middle office. “Outsourcing helps maintain lean costs, allowing you to focus on generating alpha,” he adds. Fenton has witnessed funds that began with $25 million successfully scale to $500 million while operating with lean organizations. However, he emphasizes that the choice between outsourcing and insourcing functions “depends entirely on the strategy and capital requirements from day one. If you don’t have significant funds for a complete tech stack, a physical COO, a CTO, and a robust middle office team, you must keep your operations lean.”
“For an emerging manager who hasn’t spun out of a large firm with an established track record, the primary focus is on building that track record.”
Richard Fenton, responsible for Prime Brokerage Sales at IG Prime.
Coeli Asset Management, which manages over $6 billion across a diverse range of products, “has structured our firm a bit differently than smaller boutiques”, according to Joakim Lundmark, Head of Fund Administration at Coeli. “We have developed an in-house support platform that includes compliance and risk management, along with lean teams in the middle office, distribution, and other critical functions,” explains Lundmark. Coeli partners up with independent fund managers to form joint ventures “where incoming portfolio managers create their own MIFID companies, which are operated by Coeli so they can focus solely on portfolio management,” he elaborates. Consequently, Coeli provides a comprehensive suite of services, including middle office, settlement, and distribution, with most functions managed internally. However, Coeli does outsource “non-value-adding functions such as fund accounting and custody.” Lundmark emphasizes that for managers launching funds with less than $30 million in assets under management, “it’s essential to focus purely on the investment strategy; you can’t take on too much additional workload beyond that and continue to be efficient.”
“It’s essential to focus purely on the investment strategy; you can’t take on too much additional workload beyond that and continue to be efficient.”
Joakim Lundmark, Head of Fund Administration at Coeli.
Martin Redgård, a fund manager running two distinct systematic strategies, has opted for a similar setup offered by Coeli by partnering up with AIFM Group, to which he has outsourced all fund services. “If you want to get off the ground with a small amount of assets and mitigate costs at an early stage, it comes down to finding a service provider who can agree to cover the costs of setting up the fund and bear the ongoing costs,” expounds Redgård. “I was fortunate enough to find this partner early on, allowing me to launch with minimal capital.” Essentially, Redgård has outsourced most middle-office functions related to managing his funds, enabling him to focus entirely on strategy design and execution.
Front-to-Back Versus Best-of-Breed
When asset managers consider outsourcing, they face a choice between a comprehensive front-to-back solution or a best-of-breed approach where they select specialized providers for different functions. Andi Woolass of Enfusion raised this question with the managers around the table, asking whether they prefer a “fully integrated solution that synchronizes all aspects of the trade lifecycle, or a best-of-breed structure that enables them to cherry-pick systems, such as an EMS or other management tools tailored to specific needs, which requires more effort in integration and coordination.”
Stuart Abel, Chief Operating Officer of the expanding multi-fund boutique Tidan Capital, believes that “everyone would choose a single provider if that solution offered exactly what they needed and wanted. However, finding such a partner is nearly impossible, and a one-size-fits-all approach often ends up being one-size-fits-none.” He emphasizes that while all asset managers operate within the same industry and engage in similar activities, “every fund and every manager is very, very different.” Abel contends that a best-of-breed solution “sounds like a utopia that I’m not sure will ever exist.”
“Everyone would choose a single provider if that solution offered exactly what they needed and wanted. However, finding such a partner is nearly impossible, and a one-size-fits-all approach often ends up being one-size-fits-none.”
Stuart Abel, Chief Operating Officer at Tidan Capital.
Abel suggests, “selecting a solution that meets the majority of your needs while bolting on extra components as necessary. If a manager has an excellent overall front-to-back system but falls short in risk management, for example, the manager can bolt on a specialized risk system.” He notes that due to the diverse and specialized nature of strategies, “we all require tailored solutions based on our specific strategies, and there will always be a need for add-ons.” For Abel, “it’s about finding a balance between a one-stop shop and best-of-breed solutions to enhance that foundation.”
As a larger asset manager collaborating with various portfolio management teams, Coeli Asset Management has chosen a comprehensive one-stop shop that can be enhanced with best-of-breed solutions. “We rely on the broader, well-established Paladyne system, which allows us to plug and play best-of-breed solutions,” explains Joakim Lundmark of Coeli. He adds that “if we require an enhancement, we can easily integrate it into the system.” Given the diverse range of strategies under the Coeli umbrella, Lundmark works with six or seven custodians, all of which are connected to the main system and can onboard with virtually any prime broker. “We have established the need for a solid foundation to stand on, similar to a one-stop solution that addresses about 80 percent of our required functions. From there, we collaborate with other specialized providers, such as those offering risk solutions, to create a stable system that every strategy can utilize,” describes Lundmark.
Richard Fenton of IG Prime, which provides Prime Brokerage solutions, aligns with Lundmark’s perspective, emphasizing that seamless connectivity is essential for most managers. “We are asked time again, ‘If we execute through you, how does it feed into our back office, our fund administration, and our middle office?’” Fenton shares, highlighting the key concerns of IG Prime’s clients. “Systems have to be connected to the reporting chain and easily reconcilable. Adding extra layers of operational burdens on funds is a non-starter,” he expands.
Peter Chan, Executive Director and Analytics Business Manager for EMEA at MSCI, agrees, highlighting that “a key challenge is removing the barriers for a best-of-breed approach, ensuring our clients don’t bear the costs of maintaining multiple systems when they decide to replace existing functionalities with different providers.” As a risk analytics provider and other services, MSCI has observed growing flexibility in integrating its analytics tools with platforms from various service providers. “This trend extends beyond the hedge fund space, it includes asset owners, asset managers, IT infrastructure, and service providers across the board,” Chan notes.
“A key challenge is removing the barriers for a best-of-breed approach, ensuring our clients don’t bear the costs of maintaining multiple systems when they decide to replace existing functionalities with different providers.”
Peter Chan, Executive Director and Analytics Business Manager for EMEA at MSCI.
According to Patrik Säfvenblad of Volt, choosing best-of-breed providers not only enables asset managers to select the optimal solutions tailored to their specific needs but also enhances their credibility. “Outsourcing risk analytics to MSCI, for example, adds credibility to your reporting, just as partnering with a reputable administrator for fund administration further strengthens credibility,” Säfvenblad explains.
Daniel Mackey of Protean echoes this sentiment, noting that “when you’re a new firm looking to establish your reputation while engaging with institutional investors globally, it’s beneficial to have some well-known names among your service providers.” However, he emphasizes that “one should not choose providers just because of their name.” More importantly, by partnering with multiple service providers, managers can gain access to various perspectives rather than just one. “If you rely on a single provider for 80 percent of your services, you’ll only hear the narrative they want you to hear,” says Mackey. “In contrast, working with multiple service providers allows you to adopt a best-of-breed approach for each function, giving you valuable insights and talking points while connecting with others, including potential service providers, to stay informed about industry developments.”
Martin Rudling of Proxy P Management agrees, stating that “if you rely solely on one provider for all your needs, hoping they will serve you for the entire duration of the fund, you risk becoming unaware of what’s happening in the services world and what opportunities you might be missing.” Mackey from Protean adds to this perspective, concluding that “it’s important to have reputable names to enhance credibility, but equally crucial is partnering with providers that can address our specific needs.”
“I would never consider outsourcing anything related to trading or investor activities. However, several functions may have a clear break-even point.”
Martin Redgård, a fund manager running two distinct systematic strategies.
Although Martin Redgård outsourced all functions to a single provider by running his funds under the AIFM Group platform, he would evaluate the cost-benefit analysis on a function-by-function basis. “I would never consider outsourcing anything related to trading or investor activities. However, several functions may have a clear break-even point,” Redgård explains. “Outsourcing a function is either profitable or not. Identifying areas where you can carve out profits, especially in a small operation, is essential for long-term survivability.”
Find the full round table discussion here: (Hedge) Fund Operations
