Balancing Internal vs External Fund Management

• • There is significant variation in internal vs external fund management, with some doing 80% internal vs others doing 100% external.
  • When investing externally, access to specialized expertise across the globe is a core driver alongside the ease of operations, especially for:
    1. private markets where sourcing and execution require specialized relationships and experience
    2. hedge funds where unique return streams and risk diversification are sought 
    3. emerging markets, where local expertise is critical for navigating regulatory and market complexities

• • Strategic shifts towards internal management are driven by cost savings (without compromising performance), control, ability to invest in opportunistic deals and ability to employ proprietary strategies. Having the necessary operational and risk infrastructure is critical.
  • Asset size, location and internal expertise determine the feasibility of internal vs external fund management, as well as the ability to attract and retain top talent, especially in remote or less competitive financial centres. Creative solutions like seed-funding spin-outs can help.
  • Long-standing relationships with trusted strategic partners are key for knowledge sharing and co-investment opportunities, which can then be executed with faster speed. 

Balancing Internal and External Performance

• • Internal teams are expected to be top quartile; otherwise, external management may be justified.
  • There is increasing scrutiny of compensation for external managers vs internal PMs, especially at institutional and educational organizations. Firms need to balance the benefits of cost savings from internal teams with the potential expertise and agility of external managers.
  • Underperforming internal teams are rarely terminated, but lessons from failures (ie. shutting down a quant team) can lead to infrastructure improvements (ie. AI data platforms).