In our last newsletter article, we explored outsourcing in the hedge fund industry. To share perspectives on the industry, we contacted Vaishali Kasture, Managing Director, India at Butterfield Fulcrum – a globally reputed independent hedge fund administrator.  The company currently services around 700 hedge funds and has been in existence for over two decades.

ValueNotes Sourcing Practice (SP): Could you tell us what are the driving factors for fund managers to outsource services to a hedge fund administrator (HFA)?

Vaishali: As with any outsourcing, fund managers primarily outsource to cut costs. Fund managers operate on a ‘2 to 20’ norm that dictates their management fees and performance fees. With decreasing performance fees and increasing costs, outsourcing goes a long way to alleviate the pressure on margins.

That being said, there are other factors as well. With the sub-prime collapse and lately Madoff’s Ponzi scheme, investors insist on independence and transparency of reporting. Third parties are best poised to offer a neutral and independent view of the performance parameters.

SP: What services does your company offer?
Vaishali: We offer both back office and middle office services. However, the industry definition for middle and back office services varies.

At Butterfield Fulcrum, we offer services such as confirming trade with multiple brokers, authorizing cash payments, collateral management, reconciliation, ensuring P & L statements are accurate, risk management across geographies & industries, portfolio management, NAV calculations, etc – basically we offer services from the point the fund manager executes the trade  and we take care of the rest.

The break-up of our services by back office and middle office functions is 60:40.

SP: How do you bill your services?
Vaishali: Most services offered by HFAs are billed on basis points that depend on the performance of assets – hence an increase or decrease in assets of the fund affect our billing. Some services like corporate secretarial or accounting for private equity funds are based on time and effort basis.

SP: Where are your clients based?
Vaishali: Our clients are from diverse geographies but predominantly based in North America, Europe and the Middle-East – the 3 regions constituting 85% of our business. Of these three regions, North America is a strong revenue contributor – providing 60% of our revenues.

SP: What is your company’s delivery model?
Vaishali: Butterfield Fulcrum leverages a global delivery model with presence across the Americas, Europe and Asia. Majority of our delivery is done through our Indian office, while other centers across the world are client servicing and/or marketing offices.

Initially, the company was Fulcrum and had its production center in India and customer relationship centre in Canada. To build scale, Fulcrum acquired Butterfield Fund Services and the entity was christened Butterfield Fulcrum. In a span of last 18 months, we have successfully transitioned over 700 funds to the Global Operating Model.

SP: What role do third party BPOs play in this space?
Vaishali: To operate as a HFA, there are certain pre-requisites such as being registered in the jurisdiction where the Fund is registered. You also need specific insurance cover for Fund Admin related risks. The HFA needs to meet the regulatory reporting requirements and is subject to audit.

HFAs operate in a higher risk environment where there is significant stress on error free output and need to have a higher risk appetite than traditional BPO companies. The revenues also fluctuate based on the performance of the Funds. Suffice to say, these are inhibiting factors for new entrants in the market. Third party BPOs do offer services to fund managers but these do not fall under the realm of HFA services. Such BPOs also operate as sub-contractors to HFAs.

SP: Could you tell us more about your company’s workforce?
Vaishali: Considering the services we offer, we require the appropriate workforce that is skilled and capable. The company hires CAs, CFAs, MBAs, and BCOM graduates with 2-3 years relevant experience across various services and functional groups.

Training new employees is extensive. Since our services are technology driven, we provide comprehensive training on the platform and software we use. This is followed by training on hedge funds, accounting treatment of various transactions, understanding an interpreting the legal documents of funds, understanding complex fund structures. We need to ensure that we are abreast of any new financial instruments or products the funds may buy. It takes close to half a year for an employee to function on his/her own. Considering the training and the skill sets required for various roles within our organization, we ensure that our attrition rate is minimal – in the last year, our attrition was 7%, with all our top performers remaining with us.

SP: What are your company’s plans for the next two years?
Vaishali: We have spent the last 3 years ramping up to achieve scale and quality. Our focus over the next 2 years will be to reap process efficiencies in our global operating model. We may also look at further inorganic growth.