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Use of Third Party Providers by Buy Side is on the Increase, Says BNY Mellon Research

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As proved by the plans revealed this week by IOSCO, the regulatory community is cracking down on the hedge fund sector and one of the side effects of these increased transparency requirements is that hedge funds are turning to third party providers to help them tackle the new data challenges. Recent research by custodian Bank of New York Mellon indicates that this is not just a trend within the hedge fund community: the buy side is more prone to use external providers than ever before.

The BNY Mellon paper, which is on the convergence between hedge funds and traditional fund management firms, involved feedback from 30 traditional managers, 23 hedge funds and 18 large institutional investors. According to the custodian, a quarter of respondents indicated that they felt a need for better integration of their front, middle and back office functions and a third currently outsource components of their back office. So, investments have already been made in third party solutions and more are on their way.

The convergence between these two traditionally distinct areas of the buy side is as a result of new transparency requirements that have meant changes to hedge funds’ structures. Most of these are related to data and risk management: these firms are being required to provide a greater level of granular data to both regulators and their clients on areas that they have not previously been required to report externally.

“More and more investment firms are turning to outsourcing providers as a cost-effective strategy that enables them to focus on their core business of managing assets,” says Joseph Keenan, managing director at BNY Mellon Asset Servicing.

This trend is therefore likely to further fuel the boom in buy side focused offerings from the vendor community. After all, buy side firms will need to up their game as the stakes are gradually being raised by both regulators and their customers.

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