OPINIONS: Hedge funds to seek more efficiencies

It is a tough environment for hedge funds, which could lead to more demand for operational services as funds seek efficiencies and regulatory compliance. Funds Europe asked a range of administrators about their outlook for the admin business in 2012.

Glenn Kennedy, regional head of sales and relationship management, alternatives sector client management group, Asia-Pacific, HSBC Securities Services

Specifically in Asia, in 2012 we expect to live in interesting times. Against a general backdrop of hedge funds in the region facing challenges around capital raising and investment performance, we also see some very impressive new launches, spin-outs and managers expanding on their stable of existing funds.

We will feel the practical impact of regulatory change from the United States hitting the industry in Asia, and I am thinking in particular of Fatca [Foreign Account Tax Compliant Act]. We will continue to see investors and allocators with a heightened compliance culture, but this will play to the strengths of institutional names, those with stability and longevity in Asia and those with a strong balance sheet. 

Strength of balance sheet will be relevant even for administrators as we will see funds and their investment managers ask service providers not only about their existing capabilities but also how they are positioning themselves for the client’s anticipated future needs.

Mike Hughes, co-head Deutsche Bank Alternative Funds Services

Fund administration is no longer just about cutting net asset values. Managers are under increased pressure to deliver returns and are, therefore, looking to make sure their business is as efficient as possible.

Everything from post-trade execution to investor reporting is being reviewed. Administrators who can bundle cash management, custody, post-trade execution, middle office, collateral management, FX and hedging as well as the administration and transfer agency are looking at a very bright future.

Given this trend, we have seen and will continue to see in 2012 a consolidation of administrators to those with a much broader product offering.

Charlie Woolnough, director, Credit Suisse Prime Fund Services

The outlook for hedge fund administration remains bright in 2012 as investors challenge fund managers to provide increased independence around risk and transparency reporting and fund managers, in turn, look towards the fund administration community for assistance in aggregating and reporting this data. Those administrators who have the balance sheets and the appetite to invest in the appropriate technology to automate these requirements will be the beneficiaries.

There will be some administrators who are unable or unwilling to support the increased reporting requirements which may then cause fund managers to reconsider existing relationships. However, brand name and flexibility alone will simply not be enough to win and retain business. Client service will be, as it always has been, the decisive factor.

No doubt regulation will also figure heavily on the evolution of the industry as the Alternative Investment Fund Managers directive begins to take shape in 2012 and thoughts move towards the depository requirements for European domiciled funds.

Maria Cantillon, head of sales, alternative investment solutions, State Street

We expect strong growth for hedge funds in 2012. Industry data forecasts a 12% growth rate with the main driver for this coming from the heightened propensity of institutional investors towards this asset class.

The institutional investor base will be looking specifically for transparency, robust industry risk management solutions to aid with Alternative Investment Fund Managers directive, Form PF, Opera reporting and Solvency II. These specific needs will steer hedge funds towards alternative service providers who can ensure these requirements are met. Hedge fund administrators, such as State Street, will need to continue to expand and to uplift their offering with continual investment in technology, enhanced middle-office functions, provide data access for end-investors and deliver robust risk reporting and transparency.

It will be imperative for service providers to hold a stable credit rating and ensure that they are on top and ahead of regulatory changes in order to provide solutions which meet the complex and changing environment of 2012.

Marion Mulvey, EMEA head of alternative investment administration services, Citi

Independent administration services are now more relevant than ever for hedge fund managers and their investors alike.

Transparency will also remain a core priority for hedge fund investors going forward and they will require administrators to provide independent analysis of fund portfolios and assets. Recent market developments also underscore the need for independent board directors to help prevent potential governance issues and conflicts of interest.

Third-party administrators will continue to expand their client base and product offerings as more hedge funds look to outsource middle-office services to drive down costs against the backdrop of more stringent regulation.

The increasingly complex environment is likely to benefit those large administrators that are able to provide a one-stop-shop for clients.

Gavin Byrnes, head of business development UK, fund services, UBS Global Asset Management

The industry will face many challenges ahead, such as further regulatory requirements and more vocal investor demands for transparency and effective corporate governance. As a result, it is critical for the future growth of the wider industry that it can meet these challenges and implement the necessary operational frameworks. This will require a uniform response from all industry participants, thereby resulting in further outsourcing of activities to service providers as managers look for scalable solutions.

The outlook looks bright for the industry but to address the challenges that lie ahead, hedge fund managers will require more sophisticated support from administrators and custodian banks alike.

Marc Russell-Jones, managing director, JP Morgan Worldwide Securities Services

Data provider Pertrac reports the number of hedge funds with assets o fmore than $500 million (€374 million) represents 7% of all funds, but 88% of all assets. This trend is set to continue driven by regulatory, political and investor pressure.

The net impact is further consolidation, forensic focus on counterparty risk and governance within the hedge fund industry as it is forced to become more institutionalised.

Phil Masterson, senior vice president, SEI’s investment manager services division

As a general matter, the administration market has picked up as firms launch new vehicles, the move from offshore to onshore continues, and the start-up market is more robust. While the European sovereign debt crisis has not had a huge impact on product launches, there remains a concern that firms will pull back from current growth initiatives.

Certainly the era of the investor prevails in which institutional investors keep ratcheting up their expectations of hedge fund managers. For example, they are pushing the industry to enhance reporting generally and, specifically, risk reporting.

Even as hedge funds and their administration partners work to meet institutional standards, those standards continue to evolve and be refined to reflect the increased sophistication of the industry at large.

Marina Lewin, head of global business development, alternative investment services, BNY Mellon

Institutional investors continue to invest in alternative investment funds in the search of alpha. As they carefully consider investments now and in 2012, they will continue to influence how the alternative funds administer and safekeep their assets. Given their desire to mitigate counterparty exposure and seek a high degree of transparency, investors are relying on third-party hedge fund administrators for their independence and financial stability. And as regulation continues to impact the alternative funds’ fundamental business models, hedge fund administrators can help the funds evolve to meet these new requirements and offer more to their end investors. However, with the evolution of the industry, there are also unique opportunities, not only for investments but also innovation. Such is the case of prime custody services, which allows funds to mitigate counterparty risk yet maintain relationships with their prime brokers.

©2011 funds europe



The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…


Luxembourg is one of the world’s premiere centres for cross-border distribution of investment funds. Read our special regional coverage, coinciding with the annual ALFI European Asset Management Conference.