When the orchestra tries familiar workarounds

Faced with these talent constraints, firms have pursued three primary strategies over the past two decades. Each offers some value, but none fully address the underlying challenge.

Playing from afar: geographic arbitrage

For the last 20 years, we've been outsourcing talent pools to other geographic locations. But issues arise when managing these distributed teams. There are persistent challenges around knowledge transfer, high attrition, and time zone inefficiency.

Investment operations require deep domain expertise that's difficult to replicate remotely, and real-time problem-solving becomes challenging when teams are geographically dispersed. Additional offshore offices can compensate, but it's expensive and takes years to get that type of infrastructure in place securely and done the right way. Firms may not want to keep expending resources on trying to diversify geographic locations while tackling regulatory and political risks.

Letting someone else conduct: the admin outsourcing trap

Within hedge funds, investment funds, RIAs, and private markets, most firms outsource their book of record to an administrator. Some do this for regulatory reasons, while others do it as a safeguard. While administrators serve an essential function, many firms struggle when they outsource other operational tasks to these providers.

Common challenges include delays in settling books, lack of customization in reports, slow turnaround times for front office requests, rigid workflows, and constrained access to data that could otherwise add value. What a firm can do is often limited by the SLAs and processing time of the administrator, with little transparency in processing or flexibility in output. Three operational areas prove particularly problematic:

Reconciliations: Breaks often pile up across complex asset classes. Firms can’t easily synchronize what they know and what the administrator knows. The reconciliation process becomes a black box. Firms just get the tied-out values back without ever seeing the full lineage.
Collateral management: There's often no way to be on top of the exact margin call or expected margin pool value. The admin is doing the legwork for the most basic process required. Firms aren't getting the potential alpha generation of being able to claw back money and optimize their portfolio. There may also be an opportunity cost if they're paying financing costs that are higher than the cost of borrowing.
Accounting: When an admin is running the whole accounting process, firms can’t trace how they got to an end accounting value like P&L or market value. Firms know what their position is and what the instrument was, but visibility between the firm and their admin breaks down with high volumes, esoteric derivatives, bilateral private credit deals in private credit, or other complex scenarios. Firms can end up in the dark of accounting values or accrual calculations.

Replacing musicians with machines: technology's limitations

Pure technology solutions in lieu of people present their own risks. Many vendors create a similar black box approach to the admin problem. If technology is not entirely transparent, such as not offering full administrative privileges to see underlying values and calculations or make updates, you're back in the same bucket as with the admin. You can't follow the full lineage within accounting and reconciliation.

In addition, some technology providers are not flexible enough. Investment operations are highly specialized, so one-size-fits-all solutions often create new inefficiencies. Technology adoption also requires significant organizational change that many firms underestimate. The customization expectation has shifted dramatically. For the longest time, we've been operating on a SaaS model where you get access to a tool, but that tool is basically the same for everyone who uses it.

This gap explains why Snowflake and Databricks have been so powerful. On the one hand, they give you access to tools, configurations, and flexibility. But you need expertise and capable operators of the technology. It shifts the talent gap but doesn’t eliminate it.

The score is getting more complex

Today’s talent shortage already squeezes investment operations teams. Teams are still getting good work done. But we're facing a narrowing window to act before the knowledge gap becomes unbridgeable. Strong talent is slowly aging out of the industry, without newer talent “aging in.” Experienced team members who understand the nuances of reconciliation breaks across esoteric derivatives, people who can spot when a margin call doesn't pass the smell test or know how accruals should flow through complex deal structures, will become harder to find without finding and training the next generation.

Geographic arbitrage, admin outsourcing, and pure technology solutions each have their place. However, they all fall short when the repertoire becomes too demanding. The question then becomes, “What does a modern operating model look like when traditional solutions aren't sufficient?”

This is the first installment in a two-part series on the talent crisis in investment operations. In the second piece, we will dive into exactly what a modern operating model entails and how firms can best position themselves for success.