Hedge Fund Service Providers: Why, who and how.

We hear from George Ralph, Managing Director of RFA - an official AYU Partner, on the important elements of an effective hedge fund service provider suite. RFA is a tech firm specialising in providing market-leading IT solutions to the alternative investment community.

Why do hedge funds need service providers?

There are so many different elements that are necessary for today’s market to run a successful hedge fund, so that dictates that nearly all funds will be outsourcing to a degree. From RFA’s perspective that could mean a fully outsourced IT solution or it could be we are fulfilling a particular role within the fund, like CTO or CISO.

There is an appetite in the market at the moment to buy in expertise; most funds really aren’t big enough to need a full-time CTO or CISO for example, but they do still need a the person in that role on their exec team to help manage risk, strategy, and of course experience.

Which hedge fund service providers are most important?

We would obviously say a technology partner! The key is to find a partner who values the entrepreneurial spirit of a launch and wants to be part of the story, thus giving a good level of support above and beyond – I sit as a non-exec director for some of our launches exactly for that reason.

I think each fund is different. Each partner will have come with a different skill set. The trick is to package the fund up it to be a well-oiled machine, and actually having a great partner who builds the right business IT architecture for a firm is what to look out for from a technology perspective.

RFA are system agnostic; we will always create the best solution for our client and this will evolve, it’s very rare for a client to be on the same systems stack they were on two years ago.

‘Digital transformation’ is a real buzz phrase right now but for a good reason. We need to look at our core business models, the way we are doing business and put the right measures in place to support the way we now work. Service providers can be a real asset to a firm to support them in making these changes.

What do investors want from service providers when doing due diligence on a fund?

I think oversight here is absolutely key. Just because you outsource services to a third party, you don’t outsource the responsibility. We usually recommend that funds have direct contracts in place for each IT service and we then work with the fund to manage them through due diligence, vendor management, and core renewals – specifically as directed by the FCA under FP16/5. Funds need to have clear controls and practices in place to support 3rd party oversight.

Firms should look at strategic and reputational risk as well as operational risk when establishing governance over a 3rd party service provider. Building regular stress tests in oversight planning is probably the best way to manage this.

How has the hedge fund service provider offering and management changed in the pandemic?

I think for us, 80% of our clients were already in a position where the 100% remote working model was possible from day one. We are a forward-thinking business, we only employ IT management professionals and part of the beauty of this is they are an enthusiastic bunch who take learning seriously. This means we keep ourselves ahead of the curve in terms of innovation.

There has been a huge take-up in the use of collaboration tools during recent months, and we now all have almost too many ways to communicate with each other: WhatsApp, Teams, email. I personally never know where the next message is going to pop up! But seriously, collaboration is key to successful working practices in 2021.

We have talked about it a lot in recent months, but cyber decentralisation and data centralisation have been the main drivers in terms of IT change over the course of the pandemic so far. This trend will continue as data centralisation is key to continuing the story around collaboration too.

We have also done a huge amount of work with our clients and our teams internally on mental health initiatives – many clients come to me for advice as we of course are looking after 300+ staff in multiple regions. We built a track and trace app of our own to protect our staff and clients early on back in March 2020 and this has now expanded to booked lunch slots, bike racks, etc.

We have also taken on larger office space (in our Mayfair residence) and this has been to provide startup clients with temporary office space. Saving on firewalls, switches, etc, and also taking away an initial burden to find a space on top of everything else.

How can hedge fund service providers work together for a shared client?

There are some exciting developments coming in terms of data particularly when we think about hedge fund service providers working together. With most firms now using data warehouses, or lakes if you prefer, to store their data it has become more malleable if you like. We are able to manipulate a firm’s data and present it in different ways not possible before. For example, a firm might have multiple systems or investor portals that it requires access to. Via the public cloud, be that AWS, Azure, or whatever, we can now build a central data dashboard where all the information from each service provider is delivered in one manageable and secure format.

One of the key takeaways from the change of working environment over the last 12 months has been the focus on tackling cybersecurity. The idea of service providers working together strategically also reduces the number of entry points to a firm’s tech setup and therefore can help reduce cyber risk.

These are definitely the next steps in terms of collaboration and we are talking to other service providers to help expedite digital transformation for our clients.

This guide to Hedge Fund Service Providers was contributed by RFA, an IT, financial cloud and cyber-security provider to the financial services and alternative investment sectors, and AYU approved Service Provider.