Five Growth Markets for Hedge Fund Administrators
|June 14th, 2012||
|Contributed by: Shane Brett, Global Perspectives|
|The last few years has seen an increase in the importance of the role Hedge Fund Administrators play within the wider Alternative Investment Industry. Increased regulatory requirements, institutional investor pressure and a myriad of Hedge Fund scandals has meant many self administrated funds (particularly in the US) have had to move to a genuine, independent Administrator.|
But while this has seen many Administrators increase their assets under administration there is also genuine concern within the industry that the provision of administration is in danger of becoming commoditised and undervalued. Mindful of this downward pressure on pricing, Administrators are targeting additional services that they can offer to their clients and the wider industry.
We have identified 5 areas the Hedge Fund Administration industry should make the focus of their growth strategy.
1. Enhanced Reporting
Investors are demanding more from their Managers, who in turn are demanding their Administrators broadening their service offering. Administrators have an opportunity to use the demands from both Institutional Investors and regulators (regarding Dodd Frank and the AIFM directive in Europe) to offer far more granular, customised reporting to their clients.
Both investors and fund managers need increased transparency and more detailed operational risk reporting from their Administrators. Many large Hedge Funds do not have the internal operational platforms to provide the expected level of detail regulators are starting to require.
Additionally the new liquidity and exposure reporting requirements that most Hedge Funds will have to provide to regulators, should allow many Administrators to mine their substantial underlying fund data for this purpose. They hold the information detailing how independently the fund’s assets are being valued and by whom. They also have plentiful data in relation to each fund’s investment exposure. The reporting of this information will become key for regulators, keen as they are to keep a lookout for signs of systemic risk within the industry.
Big Administrators like Bank of New York are already investing heavily in this “transparency” reporting. Citco, for example, announced last month that they ready to provide "Form PF" services to their clients as required under Dodd Frank. Expect all the other major administrators to announce similar services soon.
2. Institutional Investors
2012 and the years ahead is expected to see the continued growth of Institutional Investor subscriptions into hedge funds. This has now reached 60% of investors in many hedge funds. Many of these large investors, like Pension Funds, Sovereign Wealth Funds, Endowments and Family Offices are starting to require much more detailed recording and analysis of their hedge fund investments. Spreadsheets no longer cut it.
Administrators could easily offer these services to investors as an independent valuation and record keeping service for their underlying investments. They have the resources and tools to regularly and accurately calculate the value of the investors underlying holdings and provide detailed reporting to these investor segments. They can also provide advice around pricing and investment liquidity.
This is a largely new, untapped market and has plenty of potential for growth, particularly in the US market.
3. Outsourcing of Middle Office Services
There is much discussion in the industry regarding how much operational work should remain at the Managers and what should be outsourced to a third party specialist provider. While this conversation has been taking place for a few years now, empirical evidence suggests the use of Administrators to provide these services is be an ongoing and continuing trend.
Administrators hoping to capture this market will be required to undertake significant technological investment and partner with the “best of breed” middle office software providers.
4. Private Equity Administration
While many Administrators already provide a level of coverage for Private Equity, the lack of regular traded NAV’s and the illiquid nature of the underlying investments has meant this has not been a major growth area. This could be starting to change.
Just as in the wider Hedge Fund industry, investors into Private Equity structures are beginning to demand far more regular detailed reporting around their investments, its notional performance and the theoretical value that is been ascribed to it. Where possible, investors want to see this calculated by an Administrator - separate and genuinely independent from the Private Equity Hedge Fund.
While currently this is only a nascent trend, the forthcoming bumpy years for the Private Equity industry (when much of the borrowing from the heydays of the last boom needs to be rolled or repaid) should mean Private Equity Investors will be increasingly demanding regarding data and reporting from their managers. Administrators should be targeting this demand
5. “24/5, One Stop shop” service offering
Increasingly Hedge Fund Managers want to bundle administration, custody and financing with a single provider. In addition Administrators also need to be able to provide this service umbrella globally, 24 hours a day. These trends of course benefit the larger global Administrators.
Hedge Fund Managers want to be able to see that their Administrators can work on a 24 hour worldwide basis (for example with centres of excellence in India sending reports to Europe, which are then reviewed and sent onto US West Coast investment Managers for 9am local time). This "24/5" Monday to Friday global service demands a significant worldwide Administration footprint and a large operational investment.
The growth of the “one stop shop” Administrator market is also fuelling the continued consolidation of the Hedge Fund Administration industry, with larger admin houses taking over many of the smaller players. This is expected to continue. The challenge for the remaining smaller Administrators is to compete on service quality with the titans of the industry.
In conclusion, the Administrators likely to prosper in the years ahead will be those offering an expanded, flexible and granular service on a worldwide basis to both their hedge fund clients and potentially the fund’s investors.
Shane Brett is Managing Director of Global Perspectives, an alternative investment & asset management consultancy based in Dublin & London.