Why is outsourced trading on the rise for fund managers in Asia?
Massimo Labella, co-head of international prime brokerage and outsourced trading at Marex, will attend the Hedge Funds Club event on Wednesday 26th March in Singapore. Ahead of the event, we spoke to him about how outsourced trading can benefit fund managers in Asia, the key drivers behind its growing demand, and the most common misconceptions.
What is outsourced trading and why is it gaining popularity among hedge funds globally?
Outsourced trading allows asset managers and hedge funds to delegate some or all of their trading activities to a third-party provider, enhancing execution, market access and operational efficiency. It offers significant benefits such as cost efficiency, scalability, access to expertise and liquidity. Whilst it started as a niche service for smaller US-based firms over 20 years ago, there was a surge during the pandemic when managers realised that their traders and teams did not need to be based in the office to operate effectively. Outsourced trading has since gained momentum and is now widely used by hedge funds of all sizes across the globe, including in Asia. Services vary amongst providers but can include trade execution, pre- and post-trade activities, settlement, portfolio reconciliation, reporting, trade cost analysis, commission management, access to valuable research and capital introduction.
What are the main reasons why hedge funds engage with an outsourced trading provider?
Every client has different reasons and requirements. However, if I have to narrow it down, I would say there are four main drivers for hedge funds: diversification to new asset classes, access to new territories, strengthening day-to-day execution bandwidth and reducing costs.
How can an outsourced trading partner support a hedge fund’s growth strategy in terms of accessing new territories or asset classes?
An outsourced trading partner typically has strong relations with top-tier banks and other counterparties and can therefore offer access to deep liquidity pools and competitive spreads across a multitude of asset classes. Additionally, they provide institutional-grade trading infrastructure and can handle oversight, monitoring and reporting, ensuring compliance with regulatory requirements. This enables fund managers to quickly and seamlessly access additional asset classes or expand into new territories without having to invest in infrastructure and expertise that may not be available in-house.
Whether expanding into emerging or developed markets, fund managers can also bypass the complexities of establishing a local presence, which many of the larger providers have. With an outsourced trading partner, hedge funds can also gain access to experienced professionals who are familiar with regional market dynamics, local regulations and trading nuances.
A huge benefit of an outsourced trading model is the flexibility it gives fund managers to test a new market or asset class before making a long-term commitment, delivered by experts who are specialists in particular asset classes or territories. If they wish to, managers can later transition to an in-house team as they build upon their initial market insights and experience.
How can this model enhance day-to-day capabilities?
If a fund manager requires holiday cover, temporary cover or permanent additions to their trading or support team, outsourced trading partners can flex to meet specific requirements, as and when needed. They can provide cover for a particular time zone, follow-the-sun coverage for global markets or additional cover for periods of high volatility – whatever is required. As the manager’s needs evolve or change, they can scale up or down, according to their requirements. It is this level of flexibility which makes outsourced trading such an attractive proposition. Outsourced providers’ networks and broad reach can have a significant impact on day-to-day operations, providing access to broader and deeper liquidity pools, improved trade execution and enhanced performance. Their experience from working across multiple clients and sectors often means that they can also implement operational workflows which can be more advanced than most individual funds are able to build internally.
Cost efficiencies are often cited as one of the most tangible benefits. Can you elaborate on this?
Whether opting to fully outsource all of their trading activity or for a hybrid (co-sourced) approach to complement their existing setup, an outsourced model saves on operational costs such as technology, headcount, office space and other related administrative expenses. A particular benefit is that it shifts fixed costs to variable ones, providing greater flexibility for funds to manage financial pressures, freeing up the balance sheet for other key investments.
What are the most common barriers to uptake?
The biggest concerns relate to loss of control or that this model won’t deliver the performance needed. This couldn’t be further from reality. We have seen fund managers benefit from full transparency during the entire trade lifecycle, from the time the portfolio manager sends an order to the time the trade is executed – and having an experienced team of buy-side traders can result in deeper expertise and more refined processes. Far from a loss of control, outsourcing can provide access to a level of best practice and operational excellence that can be difficult to achieve with in-house resources. Another common misconception relates to the onboarding process, which potential clients can wrongly assume is very complex and time-consuming. It can actually be simple and light touch. Depending on requirements, an outsourced trading solution can be integrated within a matter of weeks.
What should a fund manager consider during the selection process for an outsourced trading partner?
It is important to do proper due diligence on the breadth and depth of services on offer. Even if all the services aren’t required in the immediate term, they may be needed as the business evolves. When considering different providers, key questions to ask include: How much operational support will there be? What is the pricing model? What level of transparency, trade aggregation and reconciliation is provided by the outsourced trading solution? How many traders do they have and what level of buy-side experience do they possess? What is the breadth of the broker network and asset class coverage? A well-chosen provider should become a true partner, fully integrating with the fund’s team and reflecting their values.
What is the key takeaway for hedge fund managers in Asia considering outsourced trading?
Outsourced trading can be tailored and flexed to suit the differing needs of fund managers – whether to access new markets, asset classes and time zones, ensure seamless execution during staff shortages or peak volumes, or for an entire trading desk. It is a proven model for reducing costs, improving scalability and performance, whilst also providing fund managers with advanced infrastructure and expertise that might otherwise be out of reach.
