Hedge Fund Question of the Week – Summer Edition – No. 6

What middle or back office function is most at risk of becoming obsolete?

Answer: The reconciliation function.

Two industry trends are converging to squeeze the reconciliation function.  First, a number of companies are currently competing to offer ever-improving software products that automate workflows from the point of trade to a fund’s general ledger.  These products interact with a variety of counterparties, including executing brokers, prime brokers, fund administrators and custodians.  Most significantly, this interactive feature automatically performs reconciliations and thereby greatly reduces (or eliminates) the once-critical need for employees performing manual reconciliations.  Second, outsource consulting firms increasingly offer middle and back office services, including daily and other periodic reconciliations.  These firms can also do so relatively quickly and for rather limited costs.

While this outlook is somewhat strategy dependent (with more esoteric strategies continuing to benefit from an in-house reconciliation function), employees who perform reconciliation functions might shift to areas such treasury management or portfolio financing and regulatory reporting.