Citi Prime Finance had launched “Hedge Fund 3.0,” an outsourcing operating model to cover the core functions of launching, managing and building out successful hedge funds. With the aid of this program, Citi said, hedge funds can focus instead on their investment management, marketing and investor relations.
“The Hedge Fund 3.0 concept reflects the emergence of specialty providers who focus on the hedge fund industry, enabling fund managers to concentrate on key aspects of investment management while reducing their base of fixed costs,” said Alan Pace, head of prime finance in the Americas at Citi. “These experts have a keen understanding of the complexities of hedge fund management and can lift the burden of building and maintaining the infrastructure needed to handle complex trading strategies, as well as extensive regulatory and reporting demands.”
Citi said that through proprietary research, it found that in “Hedge Fund 1.0,” the industry was a niche business, whereby hedge funds relied on a single prime broker to support trading and reporting.
In “Hedge Fund 2.0,” hedge funds expanded their investment arsenal to embrace imulti-asset and global strategies, including arbitrage, event-driven, macro- and credit-related strategies. This created a need for hedge funds to build upon prime brokers by building or purchasing their own trade, execution management and portfolio management platforms. To support these systems, hedge funds had to create proprietary data centers and IT support.
“As funds handled more functions internally, they needed broader expertise and more day-to-day management of resources,” said Sandy Kaul, U.S. head of business advisory at Citi. “Organizations grew rapidly, the ratio of support functions to investment functions increased, and more infrastructure and IT support was required to achieve the desired depth of controls. This led to a high fixed cost base and created problems in the wake of the global financial crisis of 2008.”
Citi’s Hedge Fund 3.0 model is designed to control and reduce the cost of IT personnel and infrastructure. It includes:
- Outsourcing of middle-office, collateral management, cash & treasury, as well as reference data management.
Off-premise IT services, including cloud computing.
Outsourcing of data analysis to support risk management and investment research.
Citi has published an overview of its Hedge Fund 3.0 model at: http://www.citibank.com/icg/global_markets/prime_finance/index.jsp