How small and mid-sized funds can use third-party service providers to stay competitive

Fund Operator speaks to Kraig Kupiec, Chief Operating & Financial, KWK Management about how small or niche fund operators can outsource to make big cost savings

Fund Operator Editor POSTED ON 12/29/2019 9:15:41 AM

Fund Operator: What is your fund’s AUM?

Kraig Kupiec: KWK Partners currently has about $150 million in limited partner capital.

FO: Do you face a lot of the pressures around the subject of fees that many of your peers face?

Kraig: Not really. We have not reduced fees in our core fund. Fund managers with a niche skillset or less-scalable strategies can more easily support fees.

In theory, each investor feels as though they can pick a stock and hold it in their brokerage account. You need to be sure your fund’s philosophy matches your investors’ needs and then be able to articulate your security selection, your hedging program and demonstrate discipline.

"In theory, each investor feels as though they can pick a stock and hold it in their brokerage account"

We did lower additional fees in our offshore feeder fund to reflect the fact the growth in those fees had outpaced its additional administrative costs to the firm. That was a client motivated review.

FO: What are some of the cost-cutting operational solutions that are available for funds of your size?

Kraig: Outsourcing pieces of the process are by far the largest cost savings for funds of our size. In many cases, outsourcing in also a good internal control for smaller firms because you create more independent reviews of your detailed workflow. 

That is a plus when speaking with investors. Integrating trading/custodian data into the accounting processes is routine for funds of all sizes and that creates large time savings.

"Outsourcing pieces of the process are by far the largest cost savings for funds of our size"

The largest costs are people and data systems (trading and analytics). Bloomberg still has a strangle hold on those terminals and their contracts term are burdensome to small firms. The regular change in rules and the increased annual filings keep compliance people happy.

FO: Is third-party outsourcing a big part of the operational make-up for funds of KWK’s size?

Kraig: As mentioned, it’s the biggest area of savings for small firms. I’d guess for even smaller funds it is imperative to be able to operate.

Independent review is also a key issue for investors, so that makes the outsourcing of some functions even more important for small funds.

While there are benefits associated with outsourcing, we’ve never been able to get comfortable outsourcing compliance. We think you need people at the firm with skin in the game.

FO: Market performance aside, do you see operational costs as a growing barrier to entry for many smaller funds?

Kraig: It certainly requires a larger upfront commitment than it used to.

The manager that used to start a fund with $1 million of their own money and another $2 million of family and friends faces a much tougher road.

"It changes the dynamic and shifts the opportunity to the benefit of the establishment"

They used to have to be able to keep the household intact while pursing the goal. Now they need to do that as well as carry the firm through some periods of losses. It changes the dynamic and shifts the opportunity to the benefit of the establishment.

FO: Do you feel that the third-party fund servicing market is doing a good job of providing services and products at competitive prices to allow smaller funds to be competitive?

Kraig: There are a broad range of service offerings and firms. Any fund manager can outsource whatever they need at a reasonable cost.

There are service providers that have greater investor base recognition and those may be a bit more pricey. But a small fund can pick and choose which function benefits by having the investors recognize that firm. That doesn’t change the fact that there are increased costs to start and run a fund.

This article is taken from the research report Fund Technology, Data and Operations, US 2019. To download the full report click here.

 

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