Institutional Investor's Alpha Magazine - October 2007 - (Page 44)

Alpha Awards: Top Service Providers the case. Terms of the settlement were undisclosed. Meanwhile, Kenneth Grifﬁn, founder and CEO of $15 billion Chicago-based hedge fund ﬁrm Citadel Investment Group, started offering Citadel Solutions, his ﬁrm’s own administrative services business, to outside hedge funds this year. Prime brokers have been under the greatest pressure. In February a New York bankruptcy court ruling allowing investors in defunct New York–based hedge fund Manhattan Investment Fund to reclaim $141.4 million from the hedge fund’s prime broker, Bear, Stearns & Co., left open the possibility that prime brokers may be held liable for fraudulent behavior on the part of their hedge fund clients. That ruling came on the heels of two class-action complaints ﬁled against prime brokers over short-selling and was followed by charges levied on the part of clients of yet another failed hedge fund ﬁrm alleging that the lending practices of UBS Securities’ prime brokerage unit contributed to the fund’s downfall. Things only got worse when the summer’s volatility led to margin calls and haircuts to lending terms as prime brokers’ hedge fund clients found themselves in dangerous territory. To determine how well prime brokers, law ﬁrms, administrators and accountants have held up to the challenges facing the hedge fund industry, and whether or not the quality of their service has been compromised, we turned to their biggest fans and critics — the hedge funds that hire them. In late spring and early summer, Alpha polled nearly 1,000 hedge fund management ﬁrms, representing $1.4 tillion in assets under management, and asked them to tell us what they really think about their service providers. The results are our third annual Alpha Awards™. Morgan Stanley leads the prime brokerage pack; Goldman, Sachs & Co. is tops among administrators; Sidley Austin and Ogier are hedge fund managers’ No. 1 picks for onshore and offshore law firms, respectively; and BDO Seidman takes the accounting crown. This year we have expanded the rankings to provide more-in-depth results. We continue to break out hedge funds’ ratings of their service providers based on specific categories such as Technology & Reporting for administrators, Regulatory & Compliance for accounting ﬁrms and Business Planning & Corporate Finance for law ﬁrms. But we have also separated the results based on voting ﬁrm size — dividing the universe into hedge fund managers with less than $1 billion under management and those with $1 billion or more — to allow managers to see how their service providers measure up in the eyes of smaller and larger hedge funds. To qualify for the overall rankings, service providers had to receive a sufﬁcient number of votes from both small and large hedge fund ﬁrms. As a result of these changes, some of the industry’s bestknown names, such as Boston-based hedge fund administrator International Fund Services, do not always qualify for the overall ranking. Although IFS is the top pick among Alpha’s Hedge Fund 100 ranking of the biggest singlemanager hedge fund ﬁrms, a shortage of votes in the under $1 billion category or the $1 billion or more category keeps the ﬁrm from inclusion in the overall ranking. (For more 44 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007 details about our methodology, see “How We Compiled the Ranking,” page 55.) Client service remains crucial to the success of service providers, whatever the ﬁeld, and proves a major determinant in how firms fare in the Alpha Awards. Nowhere is the power of customer service more apparent than in the rise of San Francisco–based Merlin Securities. Formed three and a half years ago by Stephan Vermut — the founder of what is now Banc of America Securities Prime Brokerage — Merlin’s superior client service and technology have helped the ﬁrm become one of the most highly regarded prime brokers among hedge fund managers with less than $1 billion under management. “Many prospects who come to us feel they don’t have a strong relationship with their existing prime brokers because their assets or financing revenues are too small to meet the prime brokers’ needs,” says Vermut. The long-expected decline of the hegemony of the big three prime brokers — Goldman Sachs, Morgan Stanley and Bear Stearns — is picking up speed. During the summer’s market volatility, the prime brokerage groups of Citi, Banc of America Securities, Credit Suisse and Deutsche Bank all quietly admitted to picking up business from rival ﬁrms. “In these markets our combination of depth as a global bank and carefully selected client base has been attractive,” says Philip Vasan, Credit Suisse’s New York–based global head of prime services. Over the past year hedge fund managers have increasingly come to question their relationships with service providers. Fund managers want to know that providers will stick with them through turbulent markets and that the ﬁrms they have chosen can adequately handle the growing complexity of their businesses and investment strategies. And as capacity becomes more and more constrained, and clients’ needs increasingly challenging, service providers are looking to hedge fund managers to bring more to the relationship. “Hedge funds that partner with their prime brokers get the most out of the relationship,” says Stuart Hendel, global head of prime brokerage at Morgan Stanley. ACCOUNTING T he growth of the hedge fund industry is adding up to a problem for the accounting firms that service it. As hedge fund firms become ever larger — and new funds keep sprouting up — the accounting industry is nearing a breaking point, says Robert Castro, head of financial services for Chicago-based BDO Seidman. “People are going to start realizing that they are not going to get their audits on time,” says Castro, adding that hedge funds might consider altering their ﬁscal years so their audits can be completed on schedule. Such a radical change, however, would also affect hedge fund

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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