Alternative investment management is a fast-growing segment of the asset management industry. Alternative investments include hedge funds, private equity, venture capital, and other market-specific strategies. These alternative investment strategies typically provide riskier returns than more traditional investments like stocks, bonds, and cash.
This can be a major draw for investors who are willing to accept higher risk for potentially higher rewards. This growth has created a supply shortage for skilled managers across the industry. Nowhere is this more apparent than in the alternative investment backend support outsourcing (BRSO) space.
Alternative investment industry
In this article, we'll look at the work of back-end support outsourcing, why hedge fund back office outsourcing services are needed, the types of services involved, the challenges they faced, and much more.
What is back-end support outsourcing?
Back-end support outsourcing, or hedge fund back office outsourcing, is the process of hiring third-party service providers to support a company’s core business. In the alternative investment industry, back-end support outsourcing involves providing investment management services such as record-keeping, compliance, treasury, and administration. It can also include financial planning and insurance services.
Types of BRSOs for the Alternative Investment Backend
There are two types of BRSOs for the alternative investment industry: back-office support and asset management. Both types of BRSOs are expected to see significant growth as more investors turn to outsourcing to manage the growing complexity of their investment portfolios and as more professionals require these services as a result of the new and changing regulations.
Need for BRSO in the alternative investment industry
The alternative investment industry is experiencing considerable growth. The interest in alternative investments has led to a spike in the number of private equity, hedge fund, and venture capital fund registrations.
According to the survey, the AUM (Assets Under Management) in the global alternative industry is expected to reach $23.21 trillion by 2026, up from $13.32 trillion at the end of 2021 at a rate of 11.7%.
The AUM in the global alternative industry is expected to grow at a rate of 11.7% from 2021 to 2026.
Hedge fund back office services and hedge fund middle office services will help in managing all the infrastructure of the alternative investment fund, right from the beginning of the creation of the fund structure, fund formation, fund launch, and finally the fund closing.
- In fund structure, the terms, fees, structure, and valuation need proper diligence and constant monitoring by the asset manager, which if not done correctly will lead to bad decisions.
- In fund formation, all the legal work, regulatory filings, and opening of bank accounts take place, requiring the team to manage the details with the correct information.
- In the fund-launch phase, there is a need to gather the assets and deploy the money into them, and there are different logical and operational challenges that need to be faced.
- In the last step of fund closing, there is validation of the investor, reconciliation of information, and updating of the documents.
Why are fund managers outsourcing the work?
As the alternative investment industry grows, the demand for these services will continue to increase. Investors are looking for ways to increase the efficiency of their investment process. This includes reducing risk, cost, and time.
Benefits of outsourcing for fund managers
Asset or fund managers across the globe are outsourcing the non-core operational work to third-party family office services, which includes fund accounting services, data tracking services, document management services, etc.
1.To meet investor demand
Investors are no longer demanding only the monthly NAV reports of the funds they invest in. They are more actively involved in the fund and demand frequent reporting of how the fund is performing. This is the most common reason why fund managers choose third-party hedge fund back office services, because if they continue to work on non-core tasks, their focus will shift away from maximizing investor wealth.
2.To focus on core functions
Outsourcing the backend work to third-party family office service providers will let the fund managers focus on more core functions such as identifying and selecting investment opportunities, performing research and delivering superior investment products, monitoring valuations and performance, and managing investor relations.
3.To access the team of professionals
The fund managers can have access to a team of professionals that will help support different activities in the back-office, middle-office, and front-office functions. These outsourced firms will provide the right talent, training, and continuous learning to these professionals to keep up with market trends.
4.To take data management services
The alternative investment industry is growing by the trillions, and therefore the data. Managing it internally can be difficult for a fund manager, and hence they are taking the help of a third-party data management service that is an expert at doing all the work. They have expertise in managing collections of structured and unstructured data using automated data collection and management techniques.
5.To take advantage of technology
This is also one of the most common reasons why fund managers are moving towards outsourced hedge fund service providers. Purchasing the in-house technology can be costly, and managing it requires a lot of time and effort. Fund accounting outsourcing is the place where fund management is moving from regular Excel to specialized software that generates automated reports with different attributes.
6.To work on compliance
The regulations of the alternative industry are continually changing, which requires professional knowledge and constant monitoring. Hiring a back-end firm that can provide these services will help fulfill all the compliance requirements of the fund on time.
7. For saving the cost
All these different activities or functions will definitely lead to a lower cost if done with the help of third-party fund administration services as compared to the in-house team. The fund managers can benefit from the expertise and experience of the outsourced firm in order to manage the multiple funds at a much lower cost.
Therefore, outsourcing investment management back-end support is a growing sector as investors seek to outsource the back-office functions of their fund management businesses. This allows the funds to focus on their core competencies in asset management.
Why is there a shortage of skilled BRSO talent?
The alternative investment industry has sought to meet the rising demand by expanding rapidly. As private equity, hedge fund, and venture capital fund activity increases, so will the demand for people with these skills. Also, as investors seek to increase the efficiency of their investment process, they turn to outsourcing to help them manage its growing complexity.
BRSOs are a critical component for meeting investors’ needs. This has created a critical shortage of qualified personnel to service these new investors. The shortage of skilled BRSO talent is due to the increase in demand for these services. This shortage has resulted in a significant drop in the salary of experienced BRSO professionals and a limited ability to hire new talent.
Importance of maintaining a stable workforce in the BRSO space
To remain competitive, BRSOs and hedge fund outsourcing services must focus on delivering high-quality services to their clients. Investment management BRSOs are expected to have a solid understanding of investment processes and a solid understanding of the risks and rewards of alternative investments. These skills are in high demand and difficult to find new employees with.
1.To beat the competition :
There is a need for the family office outsourcing firm to hire top-skilled talent to remain relevant in the competition. They can either do it through acquisition or organically incentivize them to retain them.
2.To fulfill the governance
As the alternative investment industry works round the clock, the large asset managers have to provide balance and freedom for their good talent, according to their peers working in traditional investment work such as equity or fixed income instruments.
3.To pay remuneration on time :
Remuneration decisions are the most different in this industry, as they do not work on a quarterly target basis and see sharp fluctuations. Failure to pay remuneration on time by outsourced family office services will result in clashes and an increase in the attrition rate
As a result, in order to retain and develop existing talent, investment management BRSO firms must hire from within. In order to maintain a stable workforce, investment management BRSO firms must continue to train and develop their employees in order to remain relevant and competitive in the market.
The alternative investment industry is expected to grow in popularity. Therefore, investment management BRSOs or hedge fund back office services will be required to support these growing demands. However, they have to deal with the lack of skilled personnel and retain them on the team.
IBN Tech is one such firm that has been providing services to the alternative investment industry over the last 10 years in the US, UK, and European markets. We have managed the assets of over $20 billion with the help of a dedicated team of CAs, CAs, CPAs, CMAs, CFAs, and MBAs (Finance) who have experience in all asset classes.