Fund managers that experienced losses upwards of $ 1 billion dollars include Fairfield Greenwich, Tremont Group, Kingate Management and Drake Management. These companies experienced heavy losses on account of overexposure to the crisis – one that was compounded by Madoff’s Ponzi scheme.

While market conditions and investor confidence are slowly increasing, a hedge fund manager’s ability to attract investors hinges on improved tracking & reporting, operational efficiencies and risk management – and providing all these while expecting lower performance and management fees. The demands of globalization have meant that an increasing number of fund managers are adopting a multi-prime broker model – the advantage being access to new markets and new securities.  But, this has led to a new set of challenges such as interfacing with different prime brokers, increase in documentation, aggregating portfolio, increased reporting, and reconciliation of various brokers.  35% of funds in excess of $ 1 billion have four or more prime brokers.

Faced with increasing cost pressures, changes in regulatory norms, specialized services, increasing volumes of information and the lack of in-house resources, fund managers are now creating new operating models – models which incorporate outsourcing.  Hedge fund managers are now outsourcing functions across their front office, middle office and back office increasing involvement with hedge fund administrators and services providers.

Middle is the ‘new’ back

By outsourcing, fund managers are focusing on mission critical functions such as investment strategy, portfolio management, risk management and marketing of funds – these functions constituting the majority of front office operations. The following table outlines various functions undertaken by front office, middle office and back office in a typical hedge fund company.

The opportunity for IT-BPO companies

Hedge fund administrators have already developed an expertise in hedge fund operations, and servicing clients in their middle office operations is a natural extension of their offerings. They have an advantage over other service providers - the later still needing to develop the required skills and expertise.

Other service providers have been offering technology and traditional BPO services. These companies have developed expertise in providing services to banking, financial services and insurance companies. This expertise ranges from services in technology, support to operations. Technology is an entry point into the market and providing operational support with it is an added advantage. But to truly address middle office functions, service providers now need to start providing domain specific services that will require significant capability building – an effort that will justify the return.