Tag Archives: Hedge Fund Back Office Outsourcing

Hedge Funds are known for their high-risk investment strategies and the role of the back office has started gaining more attention. A lot of operational work goes into running these funds and this operational work also known as “back office” includes a variety of tasks like management of risk, reporting, compliance with the laws, trade settlement, etc. Due to the complexities of these tasks, many hedge funds are now increasingly opting for hedge fund back office outsourcing. This helps them to focus on better core activities increasing the efficiency and effectiveness of their work.

In this article, we will discuss about hedge funds back-office operations, outsourcing the back-office functions, trends and considerations.

 

Understanding Hedge Fund Back Office Operations

The back office in a hedge fund plays a very important role in making sure that compliance requirements are being met, financial reports are being generated, and that the trades are being processed accurately. Some functions of the hedge fund back-office include:

Hedge Fund Back-Office Functions

Trade Settlement Processing

After trade execution, the back office reconfirms and settles trades made by the front office. This involves ensuring that each transaction detail matches those of other parties engaged in it. The process of settlement includes transferring securities & funds confirming that both parties’ obligations have been met as per agreement. The importance of hedge fund back office outsourcing cannot be overemphasized because it helps to mitigate risks related to settlements and guarantee timely completion of trades.

Management of Risk

In order to uphold the stability of the fund it is vital to observe and supervise the financial risks such as market, liquidity and operational risks linked with it. This entails measuring exposure, exploring potential losses, and implementing plans that contribute towards reducing risks. Furthermore, the stipulations as well as the investment strategy of the fund.

Regulatory Reporting and Compliance

Hedge funds are functioning within a complex regulatory environment, where it is required for them to comply with various laws and regulations. Hedge fund back office outsourcing can help ensure that all the relevant rules are followed by the fund including those which are set up by the SEC or CFTC or other regulatory bodies. This involves preparing regular reports to be submitted such as Form PF, Form ADV or AIFMD depending on the jurisdiction. Compliance can also mean keeping proper records, implementing anti-money laundering procedures as well as ensuring that all activities of the fund are open and above board.

Financial Reporting and Accounting

Precise financial reporting as well as accounting is vital for operations of hedge funds. One of their responsibilities includes maintaining detailed records about fund’s financial activities, like income, expenses, and performance metrics. All transactions have to be accurately recorded in books belonging to these funds. Timely & accurate financial reports become really important if investors want their funds’ performance disclosed for them based on clear information hence, they will make better choices & meet various requirements put forth by regulators.

Investor Reporting and Communication

Essentially, the back office serves as a link between investors and organizations through meeting their desires by giving them updated reports especially reports that talk about performance, capital account statements, and documents related to tax like K-1 or 1099 forms among other things. Timeliness is crucial because it establishes good rapport between the two parties involved. Without proper communication channels, clients may lose confidence in their investment trades leading to dismal results for them all.

 

Perks of Outsourcing Back Office Functions

Expert Knowledge

Having professionals with knowledge and expertise in Hedge Fund Back Office Outsourcing or operations can improve the efficiency and effectiveness of tasks.

Scalability

It is often seen that with the growth of hedge funds handling their operations becomes quite tedious and difficult, however, Hedge Fund Back Office Outsourcing can provide practical scalable solutions according to the required needs of the fund. This is usually not possible with an in-house team.

Prioritization of Core Activities

With the help of external companies that will be performing back-office tasks, hedge funds will be able to focus more on key investment strategies and make rational decisions. Further, Hedge Fund Back Office Outsourcing will also enhance fund performance regarding investment thereby leading to better growth.

Management of Costs

Hedge fund back-office outsourcing has the potential to optimize operational costs significantly. To avoid or keep away these expenses, outsourcing these functions to professionals would create an opportunity for companies not to incur various costs such as wages, staff training, and overheads.

Mitigation of Risks

Experts and outsourcing partners are often quite knowledgeable about risk management and ensuring that all regulatory requirements are met. Hedge funds back-office outsourcing can avoid regulatory breach risks, errors, and frauds.

 

Trends in Hedge Fund Back Office Outsourcing

Trends in Hedge Fund Back-Office Outsourcing

Regulations

With the development of various regulatory requirements, hedge funds are depending more on outsourcing partners to help maneuver complicated compliance landscapes. And Hedge Fund Back Office Outsourcing firms are adjusting to these changes by giving tailored services and expertise.

Management of Risks

Hedge funds are utilising outsourcing to improve their risk management abilities. This involves using risk analytics and reporting tools that are advanced and are offered by the Hedge Fund Back Office Outsourcing partners.

Tailored Services

Hedge Fund Back Office Outsourcing providers offer more customized solutions to adjust to the required needs of hedge funds. Tailoring these services can help hedge funds in focusing on specific operational challenges and achieve better results.

Technology

With advanced technologies like AI and blockchain back-office operations have seen a tremendous transformation. These technologies can help in upgrading the level of efficiency, accuracy, and transparency in processes such as trade settlement and management of risks.

Globalization

Hedge Fund Back Office Outsourcing partners can customize and give services like managing international transactions, handling various currencies, and ensuring that international laws are being adhered to.

 

Magistral Consulting’s Services for Hedge Funds

For successful and fruitful operations in Hedge Fund Back Office Outsourcing, we provide total back-office support services. These revolve around both the efficiency-enhancing services as well as those assisting strategic choices while ensuring compliance with regulations and laws. These services include:

Fundamental and Technical Research

In our pursuit to provide hedge funds with thorough insights into their investments’ true values, we analyze companies’ specific aspects, industries, and trends of the economy in general. Additionally, we analyze price changes over time, and trading patterns among others in a bid to improve entry or exit timing for hedge fund managers (investment timing).

Industry and Sector Reports

We prepare reports that would help hedge funds evaluate risks pertaining to particular sectors and identify possible sources of growth within them. Aiding hedge fund clients to understand high-growth industries with strategic relevance is possible through our industry reports as they detail outlooks, opportunities, and threats.

Balance Sheet Analysis and Recommendations

A comprehensive assessment of a company’s balance sheet allows us to know its financial standing. The assets-liabilities-equity structures provide valuable insights into making sound investment decisions by hedge funds.

Profiles

Our experts offer in-depth company profiles for potential targets that give a complete view in terms of financial performance, quality of management, and strategic positioning which helps hedge funds in evaluating the longevity of their investments.

DCF Modeling and Valuations

With our DCF modeling and valuation services we give accurate estimates of a company’s worth relying on future cash flows. This assists hedge funds in carrying out valuating procedures as well as making investment decisions accurately.

Reports’ Preparation

Among other documents, we offer assistance in the preparation of various types of reports like presentations for shareholders and financial statements. Coherent and accurate as well as industry-driven; our reports aim at promoting good relationships with stakeholders through effective communication.

Stock Price Analysis Reports

The study also encompasses an analysis of stock price behaviors including historical price movements, stock volatility patterns and market sentiment fluctuations. Such documents are key tools for money managers who want to know what moves the market while creating their own trading plans.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com

Hedge funds are increasingly outsourcing their back-office functions to focus on core investment strategies, enhance operational efficiency, and manage costs. Outsourcing provides access to expert knowledge, scalability, and advanced technology, allowing hedge funds to optimize their operations and mitigate risks.

The key benefits of outsourcing back-office functions include access to expert knowledge, scalability, cost management, risk mitigation, and the ability to prioritize core activities. Outsourcing enables hedge funds to enhance performance, reduce operational risks, and achieve greater efficiency.

Hedge funds should evaluate potential outsourcing vendors based on their expertise, ability to meet specific needs, and security measures to protect financial data. Other important considerations include regulatory compliance, effective integration, communication, and maintaining high-quality standards to ensure smooth operations.

Introduction to Fund Raising Process

Our firm Magistral Consulting has helped in raising funds for more than a hundred companies, start-ups, Private Equity, Venture Capital, and Real Estate funds in the past. We have done it for firms based out of the US, UK, Europe, and Australia. In the process of doing so, we have acquired immense knowledge about the process of fund-raising.

This article will focus on the process that we follow for Start-ups and established companies looking to raise funds primarily through selling equity. Options of debt financing are also explored during the fund-raising negotiations with investors. Although each firm’s situation is unique, here are the common steps that all firms follow in their journey of fund-raising. We undertake this process end-to-end for the firms looking to raise money

Steps to Raise Funds for Startups and Other Firms

Fund Raising for Start-ups and Companies

Fund Raising Process for Start-ups and Other Firms

Step 1: Deal Documentation for Fund Raising

Before the fund-raising process could kick-off, all deal documents need to be prepared. There are three documents that we find an absolute must for a smooth process. Confidential Investment Memo could be made closer to the fundraising process. These documents are:

Teaser Document: It is also known as 1 pager. It’s a brief introduction about the opportunity and usually the first document that is sent across to the investors. For a firm, it will carry an introduction to its products or services, past financial performance, future projections of revenue and profitability, returns that an investor could make in a 3 to 5-year period, and some information on the founding team. It’s ideal to have this information presented in a concise manner with almost overuse of infographics to convey the message. In no case, this document goes over 1 page in length

Pitch Deck: This document is sent after the teaser document if the investor shows interest in the opportunity. This is typically a 5 to 10 pager document carrying all the details about the firm. The details are on similar lines as in the teaser document but more detailed. Major sections include, about the firm, about business, competition, business model, financials, valuations, plans, strategy, team, usage of funds, patents, etc. not necessarily in that order.

Financial Model: Models also vary in terms of details that they capture. A start-up with just an idea can have a very basic valuation model, whereas a firm with multiple lines of established businesses may have a detailed model running into multiple sheets. The purpose of the model is to value the company and show returns to investors which are adjusted for the risk. This is the document usually required in fundraising negotiations.

Investment Memorandum: This is prepared closer to the fund-raising process. While pitch deck maybe a Marketing document, Investment Memo can be seen more as a factual document that highlights the risks clearly in the investment. This may have legal, compliance, and regulatory consequences.

The documents are customized a great deal depending on the nature of the deal like raising a seed round, Series A, Series B, Series C or further growth capital

Once all the documents are in ship-shape and all stakeholders buy into the content in these documents, it is decided to proceed with investors’ reach out.

Step 2: Target and List Generation

This step could take place in parallel with Step 1.  It is about finding the investors who may be interested in the investment opportunity that the firm presents.

Here are the ways to find out the investment firms that may be interested in the opportunity:

Funds required: For smaller fund sizes say lower than $ 5 million, a Venture Capital firm or smaller Private Equity firms will be more suitable. For larger amounts, Private Equity or Family Offices will be more appropriate

Competitive Intelligence: These are the firms that invested in a similar opportunity with the competition. For example, if you are an app that supplies drivers on-demand, which are the investors, that invested in similar apps in the recent past. The way to find that out is either through industry databases or through extensive research in news and events portals

Industry Specialization: These are the firms that specialize in the given space. If the firm is in SaaS space, it makes sense to look for investors who socializes in SaaS and has made investments in the industry

Geographical Specialization: These are the firms that specialize in investing in a specific country or region. There are global investors as well.

ESG and other considerations: Some investors specifically look for sustainable investments like Green technology etc. Other specializations are around companies founded by say women or other minorities and disadvantaged groups. Impact investing is another important category under which a company could fall.

Once the firms are identified, we proceed with the identification of individuals within those firms, who may be in a decision-making capacity to invest in your firm

The information required here is the name of the individual in each firm, their profile, email IDs, phone numbers, and office address.

Step 3: Reach-out and Meetings Set-up

A reach out is performed by mailing to all suitable investors. The email is suitably customized to the needs of each investor and conveys the salient features of the deal. Reach-out over the phone is done for investors, which is very relevant. After the initial communique, a reasonable number of follow-ups are done to make sure there are no stone unturned

On every 100 firms’ reach-out, it is expected to have 5 good quality meetings related to fund-raise. Meetings are coordinated between investors and the entrepreneur.

Step 4: Negotiations

Negotiations go in all sorts of complications on valuations. Here the Financial Model is tested out with all its assumptions. Finally, if everything is fine, a term sheet is issued by the investor. Term sheets need to be studied closely for all sorts of caveats, liabilities, and terms

Why it makes sense to Outsource the Fund-Raising Support?

Running and growing a company in itself is a challenging job. Making all arrangements to raise funds on top of that is cumbersome and takes the focus of the entrepreneur off growing his enterprise. The whole process of fund-raising could be really confusing for a first-timer. It may take a long time for someone to learn the process on his own. It might take anywhere between a couple of months to a year for a company to raise funds depending on its specific situation. This job requires specialization, network, and focus. An outsourcing firm like Magistral provides that and still gives the control back to you at the most crucial stage of fundraising like negotiations.

Our pricing

Our pricing is a mix of upfront retainer fees plus a success-fee that is a percentage of the overall fund raised due to our efforts. This is paid out to us as a consulting or a finder fee. Here Magistral is not a dealer broker and needs no license to operate in international markets. For certain situations where broker-dealer licenses or any other similar licenses are required in any geography, we have pacts with our representatives in the US, UK, and Australia.

 

There is a huge discussion on the upfront retainer fee for our services with prospective clients. The firms suggest all fees be variable and absolutely no upfront retainer. One discussion I remember where a person suggested that everyone asking for upfront fees for fund-raising is a scam. These are the same people who are paying upfront fees to their lawyers, accountants, and everyone else for their services. If they think it is not a good idea to spend even a few thousand dollars behind their venture to raise funds, why on earth will we spend our efforts behind his fund-raising efforts. It talks to us loud and clear. They are not confident about their venture and may not have resources to even survive for the period that goes into raising funds. As you see, in earlier steps, we spend a considerable effort towards fund-raising, we would not do it for anyone who is just playing around and does not mind giving a higher share of success fees at the expense of the future investors. At some level, this whole exercise needs to be seen as the effort and related pay. That is where an upfront retainer comes into play.

Negotiations are complicated. What if an investor quashes your valuations and proposes something that cuts your valuation to half? Will you take the deal? If not, how is it our fault in facilitating the deal? It’s not fair to expect from us to keep coming up with a pipeline of meetings that are suitable to all your requirements, just because our payments are tied up with the raising funds. That is another case for having some portion of payment tied to the effort and not all of it to the success. If you think your start-up has funds to hire a specialist who will look into fund-raising support full time, drop an inquiry here

Typical Results

Reaching out to 100 investors should yield a small round of financing for a business that has some sort of presence on the ground and has made some money in the past. Things get difficult for mere ideas a bit if they don’t come from someone who has not founded or run any company before. If reaching out to 1000 investors does not yield any meaningful conversations, it is possibly the end of the road for the firm looking to raise money. Growth capital in the form of Series B and beyond see a warmer response than a seed round. One should take into consideration a period of at least a couple of months on the lower side to a year on the higher side for closing the next round. If you are a venture-backed start-up it makes sense to keep working on populating the pipeline all the time for the next round.

Fund-Raising for Private Equity, Venture Capital and Real Estate Funds

Although the process of fund-raising for General Partners follows the same process, the people looking to raise funds here are more sophisticated. Also, larger amounts of fund-raise are involved here. The United States requires a broker-dealer license to arrange funds on a brokerage fee basis. We deal with funds looking to raise money by helping them reach-out to Limited Partners, purely on fixed cost and fixed effort basis. Our ideal client is one who is looking to hire an analyst for reaching out to Limited Partners and not the one who is looking to hire a Private Placement player. If that makes sense to you please drop an inquiry here

If you are in any stage of your fund-raising journey and are looking for some direction, we can get in touch for a free consulting session, drop an inquiry with all details at www.magistralconsulting.com/contact

About Magistral

Magistral is an outsourcing firm that has helped multiple start-ups and companies in raising funds. It has also helped multiple General Partners like Private Equity, Venture Capital, and Real Estate funds in raising money. For more details please visit www.magistralconsulting.com

About the Author

The author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsulting.com for any queries of business inquiries.

Activities under Back and Middle Offices and their Potential for Outsourcing

Back Office Outsourcing has been around for over a decade and picked up the pace since the financial meltdown of 2008. Middle Office Outsourcing is something that is picking up now and is expected to gather pace after the Corona pandemic. So, what is Back and Middle Office outsourcing, and does it make sense for financial services firms like Investment Banks, Private Equity, Venture Capital, and Hedge Fund firms to outsource these activities?

 

What is a Back Office?

There are not many definitions that clearly demarcate back-office activities from middle-office. A front office at an Investment Bank or a Private Equity firm is the one that interacts with the clients. It comprises people who are in touch with the market like traders, deal makers, Investor relations, and rainmakers. On similar lines, back-office functions are ones that never interact with clients, like fund administration, accounting, record keeping, etc. Back Office has now long been designated as the right candidate for outsourcing to reduce operational costs.

What is Middle Office?

Middle Office are the functions that coordinate between the front and back office. Similar functions in similar financial institutions can often be categorized as Middle Office, back office, or even Front Office. So, there are lots of blurry lines between Middle and Back Office definitions. Also, an activity that will form a Back Office activity at an investment bank can be categorized as a Middle Office activity at a Hedge Fund. Technology is now getting all the more important than it was ever before. Biggest of Investment Banks now have more than 30% of their employees working in technology-related functions. Technology and Risk Management functions are commonly being categorized as Middle Office functions across financial institutions like Investment Banks, Hedge Funds, Private Equity, and Venture Capital firms.

Potential of Back Office Outsourcing

Back Office needs to be outsourced is a forgone conclusion. It was probably a matter of discussion a decade back. Almost all big Investment Banks have outsourced their back office. Private Equity, Venture Capital and Hedge Funds are playing catch-up when it comes to back-office outsourcing. The reason for them lagging behind is that their teams are comparatively smaller to start with, which leads to limited cost advantages of outsourcing for them. Hedge funds have rather taken the technology way to reduce costs with developments like AI, ML, and Automation. Traders on most trading floors have been replaced by robots now. The conclusion here is that if your firm has a well-demarcated back office, it needs to be outsourced, big, or small. As the industry has started to rely on back-office outsourcing defacto, it will be difficult to compete in the market for those who decide to keep it in-house.

Potential of Middle Office Outsourcing

Middle Office Outsourcing is a hot topic now. It is gaining ground with investment banks who were pioneers even in the back office outsourcing space. Increased capabilities of vendors, further pressure to reduce costs and improve bottom-lines, and competitive pressures are the major trends that are aiding the phenomenon. It’s not right to suggest that all functions of the Middle Office could be outsourced right away. It depends on the processes, culture, and cost structure of the financial institution in question.  In conclusion, Middle Office Outsourcing is something that is still taking shape. Though a lot of it could be outsourced, the moot subject is what and how much.

Outsourcing for smaller firms

If an Investment Bank, Private Equity firm, Hedge Fund or a venture capital firm is around 20 people or less, they are continuously caught up in the dilemma to outsource or not. A big firm with hundreds and hundreds of traders would save millions of dollars by outsourcing, the same could not be said about the smaller firms. Smaller firms operate in a niche and fear losing the competitive edge if they go for outsourcing. The low-quality perception of outsourcing does not help give them confidence either. It was so far so good. Some smaller players did survive the last financial meltdown on the back of their superlative services and the network of loyal clients. It’s debatable if they will survive the current pandemic too. In the changed scenario, it is almost imperative for a smaller firm to outsource both the back office and middle office if they need a worthwhile shot at survival. When we talk about the back office and middle office of a smaller financial services firm, it’s pretty much all of their analyst capacities. Thousands of one-man shops are thriving on the formula of outsourcing when the deal is there and conserving the cash when it is not.

Middle Office and Back Office Outsourcing Trends

Multiple trends are evident in the market. Some of the prominent ones are:

Back Offices at bigger financial institutions have been outsourced. A mode could be different in a way having owned captives in a low-cost country or giving a big contract to a leading vendor, but the fact remains, that the physical location of the back office now is a low-cost country.

Middle Office Outsourcing is in a transitional phase: A middle office is being planned to be outsourced. Some players have outsourced the junior positions with mid-level and senior positions in-house. Some are toying with outsourcing the simpler functions over the complex ones

Outsourcing is catching up with Private Equity, Venture Capital and Hedge Funds: Investment Banks definitely took a lead in outsourcing but now even typically smaller financial institutions like Private Equity, Venture Capital, Family Office, Hedge Funds, Real Estate, and Asset Management firms have also started to experiment with varying degrees of exposure to outsourcing

It’s not only about costs: Outsourcing has come a long way from being a lever of only saving costs. Vendors have developed advanced skills and now are in a better position to enhance the skill of the in-house team. It is possible because the vendor is working across geographies, financial institutions, and investment philosophies. A vendor can now bring a fresh eyes’ perspective to the operations and help the financial institution up its game

Pandemic will relay the rules: If outsourcing was just an option before the pandemic, it may not be so afterward. Financial institutions are expected to face cost-related headwinds that will force them to outsource to survive

Increasingly complicated assignments being outsourced: Assignments like Financial Modeling, Investment Research, Outsourced CFO, Fund Administration Process, Hedge Fund Analytics, Pitch Decks, Portfolio Management, etc. are increasingly being outsourced by Investment Banks, Private Equity, Venture Capital and Hedge Fund firms.

Overall back office and middle office outsourcing are at different stages of maturity across the financial institutions. While large investment banks are pared to the bone when it comes to taking advantage of outsourcing, the mid-sized and smaller investment banks have only started recently experimenting with the trend. While Investment Banks, in general, are more mature and warm towards outsourcing, firms like Private Equity, Venture Capital, Hedge Funds, Family Offices, Real Estate, and Asset Management are now opening more and more to the idea. What large institutions identified as a tool to maintain their profit margins, smaller institutions are finding that tool to be the key to survival and profitable growth.

Service Offerings of Magistral Consulting

Here are the service offerings that Magistral provides:

-Daily/Weekly/Monthly Review of NAVs

-Reconciling Cash Trades and Portfolios

-Monitor Trades and Corporate Actions

-Maintain Investment Book of Records

-Independently price the portfolio

-Performing Investor Allocations

-Reporting Profit and Loss

-Client reporting for funds

-Reviewing and preparing all financial statements

-Managing relationships with service providers

-Providing tools to monitor systems and processes

Magistral Consulting (www.magistralconsulting.com) is a premier outsourcing firm that has helped multiple firms like Investment Banks, Private Equity, Venture Capital, Hedge Funds, Asset Managers, Real Estate, and Family Offices in outsourcing their back and middle office. To schedule a free discussion without any commitment, drop a line at   https://magistralconsulting.com/contact/

 

The Author Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsulting.com for any queries on the article of business inquiries in general