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Outsourcing Trends in the Alternative Asset Industry from an Institutional Investor Perspective

Over the last few years, the alternative investment industry has seen a shift toward fund managers outsourcing some of their operations components due to investor demand, regulatory requirements, among other objectives. At the EisnerAmper and Blue River Partners inaugural Alternative Investments Forum: Dallas, which took place September 30 at the highly distinguished Crescent Club, a quartet of panelists shared their perspective on the latest trends and what the future holds with respect to third parties handling non-investment components.  

The panelists included:

  • Greg Ciaverelli, Partner, Chief Operating Officer, Private Advisors
  • Jeffry Haber, Controller, Commonwealth Fund
  • Alkesh Gianchandari, Institutional Sales – Director Global Client Group, Deutsche Bank Asset Wealth Management
  • Michael “Mickey” Minces, Co-Founder & General Counsel, Blue River Partners

The interactive discussion was moderated by Stephen Mazzotti, Partner, EisnerAmper.

Here were a few key themes discussed:

  • After informally polling the audience, the majority of attendees said they outsourced some of their operational components and the panelists concurred that this is a trend that will continue going forward.
  • While the majority of alternative investment managers have outsourced and are expected to continue outsourcing their accounting, administration, and legal functions, deemed the most common facets; on another level, the industry has seen both hedge funds and private equity firms appoint third-party service providers for other components.
     
    1) Structuring/Marketing/Distribution: Managers who solely want to focus on trading their portfolio have turned to Wall Street investment banks to assist them with structuring their fund contingent upon investor preference to create a Limited Partnership vehicle or Separately Managed Account, to name a couple of options. And further, the investment bank has helped them distribute it to allocators. Additionally, with the Alternative Investment Fund Managers Directive (AIFMD) causing U.S. managers to have a more challenging time marketing to Europe, these investment banks have helped them create an AIFMD-compliant structure to raise money from allocators on that continent.
    2) Compliance: With heightened regulatory requirements, many managers continue to outsource some compliance functions when they don’t have the resources in-house to handle them. However, the ongoing debate continues whether firms have a dedicated chief compliance officer (CCO) or if they do not have a CCO, have a chief operating officer (COO) and/or chief financial officer (CFO) who also wears multiple hats and acts as CCO.
    3) Information Technology: Further, with more attention regarding cybersecurity threats, managers are expected to continue outsourcing their IT capabilities.
    4) Valuations/Risk Reporting: Alternative investment managers will continue to outsource their valuations work and risk reporting to third-party providers given it demonstrates independence. However, it is important that firms have someone in-house to double check the work of the outside provider. 

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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