Hedge funds spend big part of fees on middle and back office

Hedge funds spend 19% of revenue on operations, according to a survey by KPMG on behalf of PCE Investors. One out of 10 managers does not cover their costs with management fees, it also revealed.

PCE Investors, a hedge fund operations outsourcing platform, said the survey found that hedge fund managers on average spend 45% of their management fees on middle and back office. Eight out of 10 considered investors are placing more emphasis on the back and middle office.

When over 70% of a hedge funds manager's clients are institutional, the proportion spent on corporate control increased significantly, according to the survey.

"The landscape of managing a hedge fund business has become more complex. Investors are now driving the need for pertinent risk controls, efficient operational systems and studious compliance in a way that has not before been witnessed,” said George Cadbury, PCE Investors president.

“Managing the associated costs, however, are as important as managing the portfolio. PCE simplifies the complexities of running a fund business, enabling managers to focus solely on alpha generation," he said.

According to Andrew North, principal advisor, investment management, KPMG, "The portfolio of services managers are comfortable outsourcing is expanding; moving from traditional fund administration and IT, into the middle and back office as well as business support functions such as compliance."

The survey was commissioned by PCE Investors from KPMG. The participants were based in London and had combined assets under administration of $13 billion with a significant proportion under $1 billion. The survey looked at the structure of the cost base of small to medium sized hedge funds looking specifically at outsourcing and where costs are expected to change in the future.