Tag Archives: Hedge Fund Outsourcing

Picture a hedge fund that deals with very dynamic markets, unceasing regulatory pressure, and an influx of alternative data. In this scenario, the outsourced hedge fund analytics has become one of the most tactical moves for the enhancement of speed, precision, and investment confidence. This change is encouraged by the growing cost pressures and the desire for more quantitative insight. While the managers encounter thinner spreads and heavy scrutiny, outsourcing enables them to concentrate their internal skills on high-value areas. At the same time, leverage specialized models, alternative datasets, and scalable analytical power that organizations usually invest heavily in for internal use.

With the use of more advanced models similar to those used in real estate financial modeling, hedge funds have started to outsource as a way of acquiring specific modeling expertise in the sector without the long hiring cycles. This results in smoother deal screenings and quicker portfolio decisions.

 

Outsourced Hedge Fund Analytics: Market Overview

The global hedge fund industry is large and growing. The hedge fund market was valued at USD 4,879.6 billion in 2024. It is projected to grow to USD 6,396.4 billion by 2032, at a compound annual growth rate (CAGR) of ~4.0%. Geographically, North America dominates the industry, with the U.S. accounting for 81% of the market share in 2024. By investor type, institutional investors (such as pensions, endowments, and insurers) are the largest segment, followed by high-net-worth individuals, family offices, funds of funds, and retail investors. This concentration reflects how allocators continue to lean on hedge funds for diversification, risk-adjusted returns, and alternative strategies. The demand for outsourced hedge fund analytics is accelerating because asset managers need to operate leaner while analyzing more data exponentially.

Outsourced Hedge Fund Analytics: Market Overview

Outsourced Hedge Fund Analytics: Market Overview

This section explores the forces shaping demand, including cost optimization, alternative data growth, and regulatory expectations.

Cost Optimization and Operational Flexibility

Hedge funds are under pressure to deliver alpha while keeping management fees competitive. Outsourced hedge fund analytics reduces fixed costs by converting analytics functions into variable expenses. A recent PwC operational benchmarking study noted that funds using external analytics partners experience up to twenty-five percent lower research-related cost burdens. The flexibility to scale up or scale down quickly is especially valuable in volatile markets, allowing funds to avoid large internal teams during quieter macro cycles.

Access to Specialized Analytical Models

External analytics teams bring niche capabilities that many funds cannot build internally. These include machine-learning-based factor modeling, risk decomposition engines, and automated screening systems. Many hedge funds now rely on outsourced quantitative modeling similar in structure to what private equity teams use for portfolio analytics. The result is a stronger ability to evaluate new asset classes, back-test ideas, and deploy capital faster.

Surge of Alternative Data

The market for alternative data was valued at USD 7.20 billion in 2023. It is projected to continue its rapid expansion at a compound annual growth rate (CAGR) of 50.6% through 2030. Hedge funds now integrate credit card data, satellite imagery, social sentiment, and supply chain feeds. Outsourcing accelerates ingestion, cleaning, and interpretation of these huge datasets. External partners frequently operate with advanced data engineering stacks, which hedge funds utilize to derive signals with higher precision. The raw data stream has rendered contracted personnel particularly crucial in tasks like venture capital market research. It is characterized by a mixture of structured and unstructured datasets used in predictive modeling.

Regulatory Pressures Driving Better Reporting

Regulators in the U.S., Europe, and Asia now require very detailed portfolio analytics, scenario modeling, and liquidity stress tests. Outsourced hedge fund analytics gives access to standardized reporting dashboards, helping them stay compliant without expanding internal compliance teams.

 

How Outsourced Hedge Fund Analytics Enhances Investment Decision-Making

Outsourced hedge fund analytics is an innovation that dramatically transforms investment workflows by making signal generation, risk management, portfolio attribution, and decision-making faster and easier.

Sharper Alpha Generation through Quant-Led Research

Outsourced modelers help create factor screens, produce hypothesis-driven datasets, and signal comparisons across different regions. Multi-factor strategies now account for more than one-third of global equity flows managed by quants, indicating that there is a demand for more in-depth analytical foundations.

Faster Idea Validation and Back-Testing

External analytics teams cut down the time required for the validation of ideas. Rather than waiting for internal quant teams to conduct comprehensive back-tests, outsourced professionals can provide model simulations in just one overnight session. This speed-up in the cycle makes the market more competitive, where execution gaps of milliseconds influence the results.

Risk Decomposition and Exposure Management

The application of sophisticated risk modeling remains the most significant reason for outsourcing. Funds use partners to quantify factor-based exposures, track systematic and idiosyncratic risks, and understand sectoral bifurcations. The capability of performing fast scenario analysis is yet another point attracting investors in capital raising conversations. Because the demand for risk transparency is getting deeper.

Portfolio Attribution and Performance Diagnostics

Attribution analytics is how managers get to know the actual sources of alpha. Outsourced teams can analyze daily P&L contributions, factor premiums, and execution analytics. This is to make a small adjustment to the strategy, thereby creating a stronger alignment between the investment vision and performance.

Automation and AI-Driven Efficiency

Automated insights cut down on manual spreadsheet work and boost the reliability of results. This trend coincides with the progress made in DCF valuation and financial modeling.

 

Operational Advantages of Outsourced Hedge Fund Analytics

Outsourced hedge fund analytics not only enhance the performance of investments but also the very foundation of hedge funds, consisting of operations.

Scalable Analytics Without Long Hiring Cycles

Hiring senior quants, data engineers, or econometricians is expensive and slow. Outsourced analytics teams provide instant access to talent without compromising work quality.

Higher Accuracy and Reduced Human Error

Utilization of a structured analytic pipeline brings about the elimination of human error and inaccuracies in reports. External recruiting firms enforce consistent practices for their auditing and thereby enhance accuracy for the entire research, risk, and valuation process.

Faster Turnaround for Research and Reporting

Hedge fund analytics teams that are hired from outside often work in different time zones. This means that hedge funds can have a workflow that is almost continuous. This leads to quicker reporting, faster and desk-ready model creations, and improved execution strategies.

Improved Business Continuity and Redundancy

Analytics production might be held up because of disturbances like fluctuating markets, changes in staff, and regulations. However, outsourcing partners through their globally spread teams add redundancy to the process, thus ensuring an uninterrupted and continuous flow of analytics and reporting cycles.

 

Outsourced Hedge Fund Analytics: Future Outlook

This section elucidates the future projection of outsourced hedge fund analytics concerning large datasets, cross-asset strategies, and advanced AI models.

Outsourced Hedge Fund Analytics: Future Outlook

Outsourced Hedge Fund Analytics: Future Outlook

AI-Driven Modeling Will Become Standard

Generative AI is changing the scenario of hedge funds for the better by providing them with new ways of thinking, analyzing alternative data, and drawing conclusions. By 2028, AI-supported research is expected to be standard across most asset managers. Analysts value the AI in asset management market at USD 4.62 billion in 2024 and predict it will reach USD 38.94 billion by 2034, growing at 23.76% annually.

Multi-Asset and Macro-Quant Convergence

As multi-strategy funds expand into commodities, credit, and macro, outsourced analytics teams will support cross-asset research by building integrated macro-quant dashboards. AI has also started changing the way of doing investment banking analytics because of the removal of partners who are excellent at working with capital-intensive modeling.

Increasing Institutional Demand for Transparency

The generation of investors is expecting nothing less than full disclosure and ESG metrics along with real-time reporting. Analytics done by the outsourced groups make this possible since they create pipelines for reporting that are standardized across the globe, thus enabling real-time reporting.

Hybrid Teams as the New Normal

Outsourcing will not replace internal analysts but will create hybrid working models where external quant teams will be directly collaborating with portfolio managers and risk officers.

 

How Magistral Consulting Supports Outsourced Hedge Fund Analytics

Magistral provides a wide range of outsourced hedge fund analytics services. It includes support for risk modeling, compliance reporting, and operational scalability. Its cross-functional teams of quants, analysts, research specialists, and data engineers handle everything from screening and back-testing to factor modeling and portfolio diagnostics.
>Magistral’s outsourced hedge fund analytics services align with industry needs by offering standardized research frameworks, customized quant models, and alternative data processing capabilities. The firm assists hedge funds in adopting AI-enabled analytics so they can enhance trading signals and portfolio intelligence. Using the same disciplined approach found in its investor intelligence solutions, Magistral ensures that hedge funds receive predictive models, automated dashboards, and actionable scenario analyses. The company’s expertise includes AI-assisted deal analysis and portfolio surveillance systems, thereby solidifying its position as a strategic ally for funds that need large-scale analytical support.

 

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

Nitin is a Partner and Co-Founder at Magistral Consulting. He is a Stanford Seed MBA (Marketing) and electronics engineer with 19 + years at S&P Global and Evalueserve, leading research, analytics, and inside‑sales teams. An investment‑ and financial‑research specialist, he has delivered due‑diligence, fund‑administration, and market‑entry projects for clients worldwide. He now shapes Magistral Consulting’s strategic direction, oversees global operations, and drives business‑development support.

FAQs

What tasks can be outsourced in hedge fund analytics?

Funds commonly outsource quantitative modeling, factor analysis, alternative data processing, back-testing, portfolio attribution, risk modeling, and compliance reporting.

Is outsourcing analytics secure for hedge funds?

Yes, leading providers follow strict data governance protocols, access controls, and compliance standards to ensure secure handling of sensitive financial information.

How does outsourcing improve investment decisions?

Outsourcing provides access to specialized models, advanced analytical tools, and faster turnaround times, helping managers test ideas and manage risk with greater accuracy.

Why is alternative data central to outsourced analytics?

The scale and complexity of alternative data require specialized engineering, cleaning, and modeling workflows that outsourced teams can provide efficiently.

Are outsourced analytics suitable for small hedge funds?

Absolutely. Smaller funds benefit most because outsourcing allows them to access institutional-grade analytics without building expensive internal teams.

 

Introduction to Hedge Fund Outsourcing

Operations Outsourcing for Hedge Funds is slowly becoming a viable proposition to improve analytical excellence and reduce the operations’ cost. Almost all types of hedge funds can benefit from outsourcing and research support services. It aids the smooth functioning of Hedge Fund operations. Hedge Fund outsourcing not only helps in reducing operations cost, but it is also immensely helpful in raising the analytical standards of the fund.

Hedge Funds are investment vehicles that invest in stocks to give superlative returns to their investors. They follow multiple strategies like long-short equity, market neutral, merger arbitrage, convertible arbitrage, event-driven, credit, fixed income arbitrage, global macro, Short only, and Quantitative. Here is what these strategies are and what could be outsourced by each strategy

Long-Short Equity Hedge Fund

This is by far the most common form of Hedge Funds. Here the fund manager takes long and short positions on the stocks where he believes the stock will go up and the stock will go down respectively. Ideally, long positions should match short positions, so that risk from overall market movements is hedged. However, in practice, the ratio of long and short positions varies with every fund manager. Generally, there are more long positions than short ones. Taking long positions on expected winners acts as collateral to short positions in the expected losers

Long-short Equity is an extension of pairs trading, where a fund manager takes opposing positions in similar stocks in the same industry. If a stock looks overvalued as compared to another in the same industry, the fund manager goes short on the overvalued stock and long on the undervalued one. This relative positioning hedges the risks of market fluctuations in either direction

Hedge Fund outsourcing in long-short equity funds have reduced operations cost by 40-70% and at the same time is known to bring the new skills to the fold of the fund.

What could be Outsourced

Here is what could be outsourced conveniently in a Long-Short Equity Hedge Fund

-Equity Research

-Middle Office

-Fund Administration and Accounting

-Data Management (Collection, Cleansing, Automating and Templatizing for Insights)

-Industry Research

Market Neutral Hedge Funds

Market neutral hedge funds are long-short equity funds that hedge the value of long and short positions. The value and volume of long positions match the value and volume of short positions. This ensures that the risks of market movement are minimized. That also means that the returns from such hedge funds are far moderated than the funds that are biased towards long positions. As its type of a long-short equity fund, outsourcing carries similar potential.

Here is what could be outsourced conveniently in a Market Neutral Hedge Fund

-Equity Research

-Middle Office

-Fund Administration and Accounting

-Data Management (Collection, Cleansing, Automating and Templatizing for Insights)

-Industry Research

Merger Arbitrage Hedge Funds

This is a unique kind of event-driven hedge funds that play on a merger event. Whenever a merger event is announced, the fund manager buys the shares in the target company and shorts the shares of the acquiring company in the prescribed share swap ratio. It creates a spread that incentivizes the fund if the merger goes through. This is however a risky proposition and fund loses in case the merger does not go through due to any regulatory or internal reasons.

Apart from usual activities, here is what could be outsourced:

-News tracking related to M&A

-Merger Modeling

-Valuations

-Industry Reports

Convertible Arbitrage Hedge Funds

Convertible Arbitrage is securities that combine bonds and equity. Fund Managers are usually long on bonds and short on the equity that they convert to. Fund managers maintain a delta neutral position throughout. So if the equity value goes down, they need to buy more equity and hedge more if the stock price goes up. It forces fund managers to buy low and sell high. These funds return superior performance if there is volatility in the market.

There are multiple facets of operations that could be outsourced here

Event-Driven and Credit Hedge Funds

This is another unique type of hedge fund that thrives on special situations like bankruptcy. These funds focus on acquiring senior debt that gets paid over other kinds of debts in case of bankruptcy. Credit Hedge Fund on the other hand looks for arbitrage between senior and junior debt from the same issuer. They also trade between securities of different qualities from different issuers

Apart from regular operational aspects, here is what could be outsourced here

-Research around the events that allow the opportunity to kick in for the Hedge Fund

Fixed Income Arbitrage Hedge Funds

These Hedge Funds buy securities on one market and sell them on another market and make money from the arbitrage existing between the two market prices of the securities.

Global Macro based Hedge Funds

Some Hedge Fund focus on macro trends around countries, markets, commodities, trades, etc. to bet on different investment and trade from opportunities that these macro changes may throw-in.

Global macro changes research could be outsourced here.

Short Only Hedge Funds

These Hedge Funds bet on the failure of a company. They look for companies that may have unsustainable business models and go short on them. It’s the short part of the Long-Short Equity Hedge Fund.

All the elements of the Long-Short Hedge Fund could be outsourced.

Quantitative Hedge Funds

Quant based Hedge Funds solely depend on mathematical models to make buy or sell decisions. Their algorithms are obscure and they use tools like Machine Learning, Artificial Intelligence, High-Frequency Trading, and other technological tools to produce returns.

All regular activities related to Hedge Funds like Administration could be outsourced here.

Here are the activities that Hedge Funds commonly outsource:

Hedge Fund Outsourcing Activities

Activities that are commonly outsourced by Hedge Funds

Equity Research Outsourcing/ Hedge Fund Outsourcing

Equity Research Outsourcing is by far the most important element of Hedge Fund Outsourcing. Equity Research outsourcing helps the in-house team track more stocks and sometimes to give more depth to the same set of stocks that are tracked by the fund. Fundamental and technical equity research, both could be outsourced effectively.  DCF models are prepared for each stock and then tracked progressively for any changes or news related to that particular stock. Earnings call transcripts are duly recorded and analyzed for a recommendation. A short 2-3-page report is prepared for every stock with the overall recommendation and the rationale for the recommendations. Hedge Fund Research tasks are completed seamlessly with the offshore team acting as a natural extension to the in-house team

Markets/Industry Research

If an investment theme is weaved around a specific country, industry or an emerging theme, its imperative to track that industry, market, or theme closely and regularly. A market is tracked for any macro-level changes like new tech, change in regulations, key movements, trends, etc periodically say quarterly. Several indices are also tracked regarding this. It’s quite common to track 14 S&P industries or some of its components therein. For index hedge funds, the performance of various indices is tracked

Typical examples may be tracking the insurance market in North Africa or metals and mining in South America. If your fund has a bigger interest in stocks that are based in those markets, it makes sense to have the key metrics of these industries reported to you regularly.

Manager Research

This is important for Fund of Funds. As part of their investment strategy, they are continuously on a look-out for hedge funds that fulfill a given set of criteria like vintage, past returns, investment themes, etc. Each fund is analyzed for risk-adjusted returns over a fairly long period like 10 years or so to find out the most suitable funds.

This requires getting in touch with multiple funds across the globe, collecting information, analyzing it, and then presenting holistic recommendations on where the fund stands. All of this could be outsourced.

Bond and Other Fixed Income Instruments Research

For hedge funds that operate on the lines of fixed income, the research is done that is related to sovereign and government bonds, corporate bonds, fixed income instruments, and several other investment options like that.

Fund Administration and Accounting

Fund Administration is outsourced for activities related to accounting, bookkeeping, and general administration of the funds. This also forms part of Hedge Fund Middle Office Outsourcing. Some bookkeeping aspects also come under Hedge Funds’ back-office outsourcing. It keeps the documentation trail of all the trades, makes sure all operational processes are followed and exceptions are duly approved. Hedge Fund books are maintained in the prescribed format. It also takes care of investor communications like portfolio allocations, portfolio valuation, capital calls, taxes, profits, fees, NAV, portfolio, etc. Customized Hedge Fund newsletters for investors is sometimes prepared and sent separately to current and potential investors.

Investor Relations

This is a subset of the Fund Administration process. However, some elements of organic investors’ reach out could be outsourced as well. A tool or a portal for all the investors with all relevant information for them is prepared for seamless and updated communication. This is communication related to the Hedge Fund investments made by the investors. This might be customized to carry Hedge Fund news, Strategy, Returns, and Performance. In the case of Fund of Funds, the performance of all the underlying funds is covered.

About Magistral

Magistral has helped multiple hedge funds in outsourcing operations. You can check www.magistralconsulting.com for more details.

About the Author

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

 

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

 

Magistral Consulting (www.magistralconsulting.com) was approached by a Family Office for an assignment related to finalizing a Long-Short Equity Hedge Fund. Our assignment was to find a fund that generated alpha over a long period with minimal risk. We required the fund to focus on a specific global region, meet minimum investment values, have a threshold AUM, and a defined vintage. Here are the steps that we took to identify the fund:

Secondary Research for all best performing Asset Managers in the region:

We searched the internet for all the best performing Asset Managers in the region. It ended in us drawing a list of more than a hundred Asset Managers in the region. This was pretty much the universe of Asset Managers in that specific region.

Finding the fund satisfying the criteria with the Asset Managers:

We reached out to all the Asset Managers for the funds that satisfied our criteria (like minimums, AUMs, regional focus, etc.). This reach-out was done over the emails and several calls.

Information gathering from all relevant Funds:

We asked for Net Returns MoM since inception for all the funds that satisfied our initial criteria. This information was fed into our analytics model that calculated all fund performance parameters like Cumulative Returns, Annualized Returns, Standard Deviation, Sharpe Ratio, Sortino Ratio, Max Drawdowns, Average Up-capture, Index Capture, Average Down Capture, Index Correlations, and several other objective and subjective parameters. This process took weeks as many Fund Managers needed support from us in calculating the metrics, some needed multiple follow-ups for the information to be provided to us. The picture became clearer when all returns information was fed into the model separating the performing funds from the non-performing ones. The robust model also ensured proper consideration of risks taken by the fund manager to deliver the returns. Best performing funds were shortlisted for the due diligence.

Due-Diligence of shortlisted funds:

Due diligence involved preparing a detailed report running into tens of pages analyzing all operational aspects of the Asset Manager and the fund. We collected and analyzed information on parameters including Human Resources, Compliance Frameworks, IT systems, and Business Continuity plans. for the Asset Manager or the Management company. For funds, we collected information related to Legal framework and structure, Transactions, Valuations and Accounting, Risk Management and Monitoring, Service Providers (Admin, PB, Auditor, etc.), Ownership Structures, Current Investors and their holdings, Key personnel bio and their relevant experience, Exception to general allocation rules and several other parameters.

Evaluation of fund performance on all parameters:

We created a sanity checklist and designed a questionnaire to collect information from funds during meetings. After gathering verbal inputs, we analyzed documentary proofs to assess the depth of each parameter. Based on the numbers, documentation, and evidence, we assigned a rating to each fund parameter. Considering the weightage and performance across all parameters, we recommended one fund for investment.

This was one of the examples where the Magistral team worked closely with the client team to arrive at a recommendation that moved millions across a cross-border transaction, into a fund that has a solid track record of providing superlative returns when compared to others.

We are in the process of doing due diligence for several other funds as I write this.

The Author is the CEO of Magistral Consulting (www.magistralconsulting.com), a research and analytics firm, that helps Family Offices in identifying best performing fund managers. For any inquiries you can reach out to him at Prabhash.choudhary@magistralconsulting.com

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