External pressures force fund managers to upgrade their technology and infrastructure
NEW YORK, October 31, 2006 – Paladyne Systems, a leading provider of alternative investment solutions, today released a paper investigating the growing trend toward outsourcing within the hedge fund industry and identifies a number of external pressures that have increased the need for hedge fund management firms to significantly upgrade their middle- and back-office infrastructure in order to remain competitive.
“The huge growth in the number of hedge funds has created an intense competitive environment which has pushed managers to invest in non-traditional products and markets in an effort to maximize performance,” said Sameer Shalaby, CEO of Paladyne Systems. “The resulting operational challenges coupled with increased pressure from regulators and institutional investors have created the need for world-class infrastructure and tight operational control, which in most cases is only feasible as an outsourced solution.”
Many hedge fund managers have responded by investing in outsourced technology and middle- and back-office services. Significant growth amongst the largest service providers, in particular hedge fund administrators, can be largely attributed to the increased demand for infrastructure and daily middle- and back-office services. Fund managers interested in attracting institutional and fund of hedge funds investors are faced with the decision to either build technology infrastructure or utilize an ASP or BPO solution capable of supporting complex investment strategies.
“Such investment strategies typically include over-the-counter products and emerging markets, both of which require comprehensive operational infrastructure and IT support,” said Scott Alderson, President of Paladyne Systems. “At the same time, infrastructure costs have skyrocketed in recent years creating a cost barrier for most hedge funds. Hedge fund managers have responded by trading their privacy concerns for more cost-effective outsourcing solutions.”
The paper concludes that this outsourcing trend is at its infancy and will continue over the next several years. As competition amongst hedge funds heats up, more managers will look to outsource and focus instead on their core competency of managing money. Fund administrators and prime brokers will continue to compete for outsourcing business resulting in more acquisition activity amongst fund administrators. Hedge fund mangers will benefit from improved service, streamlined technology offerings and more downward pressure on service fees. Ultimately, the hedge fund investor will benefit by selecting amongst hedge fund managers with improved infrastructure and more efficient operational processes, leading to a reduction in operational risk and improved investor reporting.
