BNY Mellon's Pershing Unit Releases New Whitepaper Focusing on Outsourcing Solutions for Hedge Funds
Pershing LLC, a BNY Mellon company, and Aite Group LLC have
published a new whitepaper that examines critical hedge fund operations
and provides managers with best practices and a systematic framework
for helping them select and effectively manage relationships with
third-party outsourcing solution providers.
The whitepaper entitled, Fueling Growth: Outsourcing Solutions for Hedge Funds,
is available through Pershing Prime Services and BNY Mellon Alternative
Investment Services. According to the report, an increase in client
redemption requests is threatening the viability of even the most
well-managed hedge funds. Many fund managers are taking action by
reassessing their overall investment strategies and evaluating their
relationships with key service providers, such as those with prime
brokers, fund administrators and information technology companies.
Hedge funds must consider a multitude of factors to help make an
informed decision on establishing an outsourced vendor relationship,
including cost, evaluating disparate information, balancing internal
resources, prioritizing short- and long-term business goals and
establishing appropriate relationship metrics. Key findings from the
whitepaper include:
- Choosing the Proper Outsourcing Model
- A majority of hedge funds have favored the approach of implementing a
hybrid outsourcing model because it provides them with operational
flexibility to meet short-term goals using third-party service
providers for some key functions, while allowing the firm to develop
internal capabilities for long-term expansion;
- Smaller Hedge Funds Challenged by Resource Restrictions
- The hedge fund market is dominated by small- and mid-size funds, many
of whom lack expertise in specific functions and have limited
resources. These funds often opt to outsource a significant portion of
their functions to third-party solution providers and to their prime
broker. Smaller hedge funds should also consider outsourcing essential
business functions including legal, accounting, administrative and
back-office-related tasks, such as clearing and trade reconciliations;
- The Role of the Prime Broker
- Most leading prime brokers have seasoned internal consulting teams
who have relationships with a broad array of service providers--such as
law firms, real estate agencies, recruiting firms and software
vendors--and can facilitate introductions with various vendors who can
potentially meet the needs of the hedge fund. Hedge funds should
consider seeking out their prime broker's counsel before establishing a
new relationship with a third-party firm; and
- Consider Disaster and Recovery Planning in Vendor Selection
- The stability of a third-party solution provider should be an
important consideration for hedge funds as it relates to their disaster
and recovery planning. As hedge funds rely more heavily on outsourced
services, they should execute proper due diligence on a vendor's
financial viability, technology capabilities, contingency around
business continuity and disaster recovery, management and customer
service.
To help
hedge fund managers better understand business continuity and disaster
recovery planning processes and principles, Pershing Prime Services, in
collaboration with Eze Castle Integration and its colleagues across BNY
Mellon, has developed a guidebook entitled, Establishing Business Continuity and Disaster Recovery Plans: A Hedge Fund Manager's Guide.
The guidebook provides fund managers with strategic insights into
creating thorough plans that may help minimize financial loss and the
negative effects of downtime on their firm's strategic plans and
operations.
Craig
Messinger, managing director of Pershing Prime Services, said, "It is
important for hedge funds to develop a thoughtful, long-term
outsourcing strategy to ensure that its needs for support during
various stages of the fund's lifecycle are closely aligned with its
goals and objectives to serve investors well. Employing this type of
approach will enable hedge fund managers to focus on generating
profitable returns for their clients and help them grow their
businesses in a more productive manner."
Sang
Lee, managing partner at Aite Group LLC, added, "Substantial benefits
exist for hedge funds that develop strong outsourcing relationships
across their businesses. However, selecting the right vendor
relationship is a complex process. It is critical that fund managers
develop a thorough process to understand their own needs as well as
evaluate vendor relationships for cultural fit and long-term
continuity."
Pershing's
parent company, BNY Mellon, also provides a wide range of
administration services to hedge funds, funds of hedge funds and
private equity assets through BNY Mellon Alternative Investment
Services, one of the world's leading providers in this market segment
with more than $200 billion in hedge fund assets under administration.
In addition to hedge fund administration, BNY Mellon offers a wide
range of accounting, cash management, collateral management, custody,
asset management and wealth management services to the hedge fund
industry.