Asset servicing firms have been the refuge of hedge funds in today’s era of investments and securites management. There are, however, some legitimate concerns in enlisting asset services. We dis...
Asset servicing firms have been the refuge of hedge funds in today’s era of investments and securites management. There are, however, some legitimate concerns in enlisting asset services. We discuss some in this article, along with recommendations for overcoming them:
Bad rap for outsourcing among some client investors. There are many kinds of client investors. Some just hand over their assets and information and wait for fund performance results by the end of the year, while others are very hands-on, and would like to be updated more often. Some are open to all ways to boost efficiency in operations (like outsourcing); others, not very much so. For those to whom outsourcing sounds like a bad idea, it is important that fund managers thoroughly discuss its advantages, and be open about the operational issues that these outsourcing partners will help resolve. They may present to their clients their prospective partners, too, and perhaps involve them in the selection. This way, the client investors feel that they do have control over the process.
Threat to security of company and client data. Outsourcing entails a degree of opening up the company and client files to a third party, so that they can do their job. This also means threats concerning the security of these data, which can lead to cyberattacks, hacking, or access by the competitors. Ensuring security amid outsourcing will greatly depend on proper formulation of the contract between the asset management company and the asset servicing firm. Security procedures should be discussed in detail, put in writing, and monitored closely. Do ask prospective partners what security measures they adopt to promote the protection of data under their care.
Added costs. At the beginning, outsourcing means spending for the services of the third party. But this concern must be understood in the context of day-to-day operations in asset management. Outsourcing partners generally take on the tedious back and middle office functions such as accounting, tax reporting, data management, and compliance management. This allows asset management firms to release funds to just one party to be in charge of all these tasks – a move that in itself could save the company a significant amount of overhead budget. A detailed accounting of the costs that every function requires vis a vis the corresponding fees charged by the asset servicing firm will help shed light on this concern.
Adopted with the right framework, asset servicing can be a truly helpful tool for hedge funds.