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As a result of our recent article published on outsourced trading, we have had the opportunity to engage in various discussions with prospects, clients, providers, and other AWM industry veterans on the topic. We have even had the pleasure of meeting and speaking with outsourced traders that have made the transition from the asset manager to the service provider as part of their conversion.
Thanks to all of those who have contributed by asking questions and engaging with us in this thought leadership conversation. We are very excited to share a second article on outsourced trading. I have summarized our discussions in the form of Q&A.
In November 2024, I had the pleasure of presenting at InvestOps Connect. One of the key themes that resonated with the audience was that external macroeconomic factors are forcing investment managers to focus on core competencies, thus they are looking for cost optimization opportunities. Part of this discussion has increased interest in evaluating exiting ownership of three specific areas by moving to outsourcing: Trading, Middle-Office, and Data. While these trends have been evolving over the past several years, the recent market volatility has applied further pressure for managers to double down and accelerate their plans to refocus on what they do best, generate alpha and retain clients.
We will address the outsourcing of middle-office and data in future posts. The key takeaway here is that providers now have a more mature service offering to meet an increasing and more complex service demand.
"...macroeconomic factors are forcing investment managers to focus on core competencies, thus they are looking for cost optimization opportunities. Part of this discussion has increased interest in evaluating exiting ownership of three specific areas by moving to outsourcing: Trading, Middle-Office, and Data."
This service got its start with fiduciaries who manage regional and global market mandates anywhere from $500M to $100B USD in AUM, with the density of clients in the lower billions. Patterns suggest this is shifting upwards with larger firms who are willing to consider modular outsourcing for specific asset classes or regions. Hedge funds, particularly those with overworked traders, are also continue to show interest. In addition to hedge funds, we see broad range of clients that have moved over including OCIO, wealth and institutional managers. However, it is unlikely that asset managers with a trillion USD in AUM will join the outsourced trading trend anytime soon.
TorreBlanc does maintain a list of the dominant players and we have relationships with many of them. We will not disclose specifics but here are some amalgamated metric examples from various providers.
TorreBlanc recommends the provider search start with some high-level considerations prior to engaging on the details of a provider's service offering. Alignment on values between client and provider will help establish a long-term partnership, rather than looking at this as a vendor relationship.
When selecting a vendor or service provider, TorreBlanc advises our clients to select shoes that are a little bigger than what they need now, to keep an eye on future growth. All COOs have had the front office drop an urgent request to win over a client mandate at the very last minute. By carefully evaluating these factors, investment managers can select an outsourced service provider that aligns with their needs and enhances their overall performance.
The closure of UBS' Execution Hub, which primarily focused on hedge funds, is perceived as an isolated event due to resource allocation within the bank and the broader integration of last year's merger with Credit Suisse. All indicators suggest that this event is specific to UBS and not reflective of the industry.
Reach out to us! We are happy to brainstorm with you on next steps and discuss initiating the provider selection process. We can also share the implications to your organization from a personnel and oversight perspective. There is also lots of ground to cover with respect to trading such as restricted-brokers, compliance, post-trade processing, and TCA. We can help you outline all of your concerns in a structured manner so that your organization is able to make an informed decision with confidence.
We hope this article has been informative and as always, we look forward to a continued dialog with you on this topic.
CEO and Head of Advisory Practice
TorreBlanc
