Half of asset managers said they would consider outsourcing part of their front office, according to a study by global consultancy firm Alpha.
Alpha’s research polled 26 asset managers to assess appetite for outsourcing. Responses suggested front office outsourcing is becoming more appealing to asset managers, but is not seen as desirable or essential for all.
The last 10 years have seen a major shift in the nature of outsourcing. Although a relatively new idea, front office outsourcing is beginning to gain a critical mass, according to Alpha.
Regulatory changes, increasing costs and risk are driving asset managers towards outsourcing. Speaking with The TRADE, Olivia Vinden, principal at Alpha said: “Increased demand has been driven from two primary sources: a continued focus on transferring fixed costs off the balance sheet or an attempt to share the cost and effort of keeping up with new technology and regulatory compliance.”
Despite growth in interest, the study does not suggest there has been an increase in actual implementation of outsourcing for the front office. Outsourcing does not meet the requirements of every asset manager, with factors such as size, asset focus and geographic location.
Vinden said: “There is a big difference between the needs of a small asset manager which invests in vanilla assets in a single time zone versus a major global player which requires a follow-the-sun approach.”
Speaking to The TRADE, Carl James, global head of fixed income at Pictet Asset Management, formerly at BNP Paribas Securities Services - which offers an outsourced dealing desk function - said: “Front office outsourcing is likely to be focused on dealing. Portfolio management (alpha) is the key deliverable of any asset management firm, so is unlikely to be outsourced.”
“However, the size of a firm (AUM), the assets it trades, how it trades and the geographic location are all variables and contributing factors when deciding to outsource. Asset managers can completely outsource their trading or outsource specific parts of it's trading. For example, if a European asset manager wants to set up a trading desk in Asia, it could, instead, send it's orders to outsourced desks already set up in the region.”
According to Alpha’s survey, 46% of asset managers said the expect to increase the scope of outsourcing next year. The motivations for using outsourcing have shifted with risk reduction and cost avoidance being highlighted as primary concerns.
An overall growth in interest is evident but an increase in execution of front office outsourcing remains to be seen, however Alpha believes a transition is imminent.