Asset Managers Continue to Outsource Middle Office Functions

October 21, 2020

By Christopher Newman

Asset managers are outsourcing multiple business functions surrounding the accounting and operational aspects of running their businesses and one of these key areas is the middle office. It is critical that asset managers maintain strong oversight and governance over middle office processes. 

“Investment managers look to outsource certain functionality as they may lack internal resources and want greater scalability and cost reduction,” said Frank Napolitani, Chief Business Development and Marketing Officer at Seward & Kissel, LLP, a New York-based law firm.  “The popularity of outsourcing key middle and back office functions began in the post-2008 credit crisis and has continued to gain popularity as institutional allocators have accepted the outsourced operating model.”

Middle office outsourcing can create efficiencies, enhance capabilities and provide unlimited resources to skilled expertise while controlling costs. With the disruption of COVID-19 on the day-to-day operations and challenges asset managers face on keeping their businesses functioning effectively, the benefits to outsourcing middle office tasks can provide alternatives to maintaining reporting integrity and relief for staffing deficiencies so companies can focus on continuation strategies.  The middle office team is normally responsible for reaching out to critical service providers, including, but not limited to prime brokers, custodians, fund administrators, technology firms, independent directors and partners.

Middle office outsourcing allows asset managers to focus on investor appreciation, business strategies, scaling and other business objectives and contracting with the right firm can lead to success in navigating through these unprecedented times. The middle office is evolving from a pass through of data into a mechanism that provides clients with valuable information, knowledge and insights.

The role of the middle office and level of functions that are outsourced can be unique depending on the type of investment firm and the investment strategies that they employ.  These firms may include, but are not limited to hedge funds, private equity, growth equity, venture capital, private credit, private equity real estate and funds of funds.

In the past, asset managers had two choices, to either internalize operations or outsource all or a part of their operations to an independent service provider. Today, outsourcing includes a range of choices to match an asset manager’s specific operating model which can be customized to each firm’s requirements, desires and future aspirations.

Particularly in a hedge fund environment, one of the top priorities of the middle office team is to book, process, finance and accurately reconcile that all deals negotiated by the front office (stocks, bonds, futures, SWAPs or other financial assets) on a daily basis. There are numerous services that can be provided day one as well as integrated implementation models that include various degrees of involvement based on the manager’s needs. Furthermore, assistance can be tailored to the timing dictated by the needs of the business, which allows for a more balanced cost structure that supports the business model.

The long-term impacts of COVID-19 remain to be seen; however, we have already experienced significant consequences. Strategies for reducing costs while maintaining accuracy of financial reporting should always be a consideration; however, quick action to implement these efficiencies and achieve minimal disruption in the current environment are critical to business continuity.

About Christopher Newman

Christopher Newman is in the Outsourced Finance and Accounting Practice and has expertise with alternative investments accounting and operations in asset management, including hedge funds, fund of funds and quantitative investment strategy funds.