New whitepaper from Epitome Global Services is called ‘Managing in the new paradigm: Reducing hedge fund costs’. Despite the crisis faced by hedge funds can still benefit from offshore expertise of service providers.
Currently, hedge funds meet a difficult time that is magnified by fund closures, increased redemptions, liquidations and litigation. During the first half of 2008, about 350 hedge funds shut down, up 16% from 303 a year earlier. HFR estimates that 700 funds may go out of business by the end of the year. The reasons for the closures are clear and ominous.
As hedge fund performance disappears, the report indicates continued shrinkage of management fees and a drastic reduction in assets under management (AUM). At this point, therefore, it is imperative for hedge funds to look at survival when increasing costs of running a hedge fund threaten to overwhelm revenue.
The paper is also based on recent survey by KPMG on hedge fund costs.
“Increasingly managers are looking to move to a more variable cost model, geared to activity or performance,” states the survey. “The services and technology offered by service providers have expanded from monthly NAV calculations to ‘full office’ support including daily valuations, compliance, risk management, front-to-back office processing, premises and IT.”
“Managers are able to outsource more of their operations, providing flexibility and leaving them free to focus on performance. The high fixed cost elements of operations, particularly for small to medium sized firms, usually make a clear business case for outsourcing in financial terms alone.”
“There is an increasing trend to increase the extent of services outsourced from traditional fund administration and IT into the middle, back office and business support functions, including compliance and legal. This may result in more ‘pure’ hedge fund management, extending the role of an ‘incubator’ service from start-ups to mainstream, where the manager concentrates on ideas within a ‘cocoon’ of third party business support services.”
In the conclusion Epitome outlines that hedge funds engaged in offshore expertise will achieve significant savings in costs; greater operational efficiency through measurable and demonstrable results; greater accountability in the middle and back office; improvement in performance of the fund.
Other providers based in the United States, Europe or other expensive locations, can take advantage of knowledgeable partners in this space. They will gain ability to grow wider and deeper market share; ability to provide a wider range of services to their clients; measurable and real cost savings; ability to reduce their minimum fees, and attract more business.
L.D.