2010 White Paper - The Newest Capital Challenge Facing the Hedge Fund Industry— Buy or Hold?

The Newest Capital Challenge Facing the Hedge Fund Industry— Buy or Hold?

Seven Key Considerations and Suggested Action Plans for

Determining the Right Mix of Outsourcing Human Resources

Invest in Your Human Capital:

Generally speaking, the most important resource of a hedge fund is its people.  Those hedge fund managers who succeed do so because they are talented and insightful investors.  The most successful managers are the ones who are great investors, leaders and motivators of people.  They are the creators and cultivators of a firm’s culture.  Hedge fund managers are leaving alpha on the table by not maximizing their human capital. 

If the role of human resources is to provide the best return on its human resources investment, selective outsourcing/co-sourcing can augment company practices to meet this goal.  This paper explores:

Ø  the advantages of partnering with a specialist for determining the right mix of outsourcing/co-sourcing,

Ø  the support functions and skills ideally served through leveraging outsourcing specialists, and

Ø  the functions that form the core competencies of the business and should be safeguarded as proprietary practices.

With the proper mix of outsourcing and co-sourcing, this alpha can be fully realized and the firm, its employees, and its investors all benefit. 

Ø  Consider outsourcing non-core competencies.

Ø  After assessing strengths and weaknesses of management’s core responsibilities, consider selective co-sourcing with outside subject matter experts (SMEs) to coach management on how to eliminate the negative gaps.  Ideally, management will acquire new or improved skills/behaviors so outside SMEs will not be needed in the future and the new behaviors will enhance the culture.

Ø  Consider outsourcing or co-sourcing perks that are win-wins (i.e., small investment by the firm and big win for the firm’s employees) and enhance employee engagement with the firm.

Action Steps:  Start-ups or firms reorganizing after significant change

Ø  Have a skilled ‘people-advisor’ as part of the company’s team (e.g., to be credible to investors a hedge funds needs excellent third party relationships - law firm, accounting firm, prime broker, administrator, etc.).  The “people-advisor” can be another of those relationships to ensure informed decisions and appropriate policy setting happens from the beginning.

Ø  Define the culture to establish by choosing culture components from firms that reflect your desired culture (e.g., teamwork, employee benefits of a Top 5 investment bank, compensation packages in the top 10% of hedge funds, an up, over or out in two years career development philosophy, investing in all employees with particular emphasis on the key people of the firm, etc.).

Ø  Determine the optimal mix of outsourcing and co-sourcing to achieve the desired culture.

Ø  At firm life-cycle milestones and at least annually, benchmark progress to determine capability gaps.  Assess how to close the negative gaps by adjusting the outsourcing/co-sourcing mix.

Action Steps:  Maturing Firms

Ø  Annually and at life cycle milestones, verify that the firm’s culture is alive and well within the organization.

Ø  Use a human resources outsourcing and consulting firm to benchmark progress and determine gaps between present state and ideal state.  Assess how to close the negative gaps by adjusting the outsourcing/co-sourcing mix. 

The outsourcing/co-sourcing partner can serve a hedge fund’s needs in a variety of structures.  The partner may be:

Ø  a boutique benefits consulting firm,

Ø  a human resources consulting firm,

Ø  a consulting firm based on the PEO* (Professional Employer Organization) model, or

Ø  an organization that specializes in comprehensive human resources management programs.

Final Thoughts

Today’s hedge fund manager needs to formulate the best strategy possible to organize, manage, run, and grow the business.  A hedge fund manager relies on the quality of their third party relationships for prime brokering, fund administration, accounting, and legal advice to attract and grow the company’s investment assets.  Likewise, the hedge fund manager needs to consider the importance of outsourcing / co-sourcing human resources management as another key component of their third party relationships.  Protecting and servicing the intellectual capital of a hedge fund is tantamount to growing the assets of the fund’s viability and success going forward.

THE Sponsors

Breault & Smith LLC and Panegyric Marketing thank the sponsors of this white paper:  ADP TotalSource; ConCredo LLC; Corporate Leadership Resources, Inc; Financial Research Associates, LLC; and The Spiro Group.



Founded in 2003, Breault & Smith LLC is a global asset management consulting firm specializing in executive search and compensation.  The firm specializes in all positions in hedge funds, private equity and real estate.  Mr. Breault is a thought-leader and is a frequent speaker, having spoken at GAIM Asia, GAIM Cayman, GAIM Fund of Funds, European Alternative Investment Summit, Managed Funds Association and Hedge Funds Business Operational Association.  For more information, please contact: John.Breault@b-sllc.com  or visit www.b-sllc.com.



Diane Harrison is principal and owner of Panegyric Marketing, a marketing communications firm founded in 2002 and specializing in a wide range of strategy and writing services within the alternative assets sector.  She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral and a variety of thought leadership deliverables.  For more information, please contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.


* Professional employer organizations (PEOs) provide integrated services to effectively manage critical human resource responsibilities and employer risks for clients by enabling them to outsource the management of human resources, employee benefits, payroll and workers' compensation. A PEO delivers these services by establishing and maintaining an employer relationship with the employees at the client's worksite and by contractually assuming certain employer rights, responsibilities, and risk. [--www.NAPEO.org]

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Jul 11, 2010, 3:54 PM