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The paper is entitled 'Service Provider Selection and Co-Sourcing: The Keys to Establishing a Cost Efficient and Institutional Quality Hedge Fund Infrastructure'. It includes a series of articles from a range of firms spanning legal, accounting, prime brokerage, compliance, administration, technology, the aim being to provide managers with a working solution for how to develop an institutional infrastructure in a cost-effective way.
One of the report’s lead editors is Marshall Terry, chief operating officer of New York-based credit fund South Ferry Capital Management. “Managers need to think about how to handle today’s regulatory and investor demands in a pro-active way. That’s how this white paper started. South Ferry Capital Management LP launched in 2010 when the regulatory landscape was starting to look ominous. Investors were starting to ask for more so we moved quickly to create strong relationships with good service providers, a couple of whom appear in this white paper. It’s really a collective idea”, says Terry.
The key message underlining the report is that managers can create an institutional-quality infrastructure by creating relationships with the right service providers. It is a hard business to get into, the barriers to entry are higher, but it can be done. What this paper is attempting to do is help managers strike a balance between forging what it refers to as “co-sourced” relationships – where a particular function is performed by a service provider and shadowed internally by the manager – and maintaining in-sourced functions.
“If you understand what needs to be solved then by building co-sourced relationships they become an extension of your firm. All we’re trying to say is ‘Yes, these regulatory realities are daunting but you can prepare for them’”, says Terry.
It is likely that some iteration of this model will be the future of how hedge funds are run with internal teams building tighter, more collaborative relationships with their service providers and reaping the benefits, not just of an institutionalised infrastructure, but greater transparency.