Institutional Investor's Alpha Magazine - October 2008 - (Page 66)

HEDGE FUND ADMINISTRATION ● Around the world, hedge funds of all sizes are moving toward outsourcing their servicing functions director of J.P. Morgan’s Alternative Investment Services in Greenwich, Conn. In turn, many service providers are playing a more active role with fund managers right from the start, advising their clients on the potential impact of new investment instruments. “We get involved at the inception,” says Diane Cassidy, head of alternative sales in the US at PNC Global Investment Servicing in New York. “We can advise on best practices and offer subjectmatter expertise.” ROBERT CAPORALE J.P. MORGAN ALTERNATIVE INVESTMENT SERVICES “We are seeing and expect to see more launches of hedge funds that invest in distressed credit and securities.” For global administrators, one of the keys to delivering effective support at all levels is the ability to bring the right resources on line to meet a client’s speciﬁc requirements. “We have a global model with hedge fund administration support teams in Dublin, Limerick and Chicago on a single platform with a single management structure,” says Potter. “We strive to be nimble in terms of where we process, based on people, cross-training and our platform.” Wallace points to the importance of skilled, knowledgeable personnel in supporting funds’ mandates. Despite the need for technology, this is still a “people business” because of the pace of change and the level of activity, he says. “You can have great systems in place, but you really need people who understand alternative investing strategies. When you have a lot of activity, good people are at a premium. We have training programs to increase the talent pool, but it can take years for people to understand the ﬁner points of various alternative investment strategies. This is a challenge for the whole industry.” MOVING TO A ‘BARBELL’ SECTOR? A wave of consolidation is moving through the world’s ﬁnancial sector this fall, affecting hedge funds and administrators as well as investment banks and brokerage ﬁrms. Many hedge fund experts believe the servicing sector will increasingly be dominated by large global providers that have the technology and scale to process large volumes of transactions across different account structures. “We anticipate that administration will experience further ‘barbelling,’” says Isabel Schauerte, an analyst in the securities and investments group at Celent, a ﬁnancial consulting ﬁrm in New York. “The ongoing institutionalization of hedge funds will ultimately lead to a two-tiered market, with large multiservice administrators on the one hand, and niche players left to service startups and independent boutiques on the other.” Already, the trend toward consolidation among service providers is well underway. As Stainrod says, “It requires a substantial investment in technology platforms in order to serve the large multistrategy funds effectively.” On the other side of the spectrum, Wallace believes niches will always exist for specialty service providers – particularly in assisting smaller funds with complex strategies that require highly speciﬁc servicing expertise. Of course, the needs of niche-market funds vary as widely as those of the global leaders: Some managers might want only a few basic services, such as accounting and bookkeeping, while others rely on a fullservice partner. Around the world, hedge funds of all sizes are moving toward outsourcing their servicing functions. “As hedge funds invest in their front ofﬁce and risk management platforms, they look to service providers to invest in and operate their middle and back-ofﬁce functions,” Wallace adds. “A service provider can package a variety of services and bring clients those pieces of the value chain they want.” In a recent report, “Trends in Hedge Fund Administration 2008,” Celent notes that many funds now want greater middleofﬁce functionality, collateral management, risk reporting, and compliance services. “As competition heats up, the majority of hedge funds have opted to unload the burden of maintaining a back ofﬁce in order to free up resources to allocate to their core activities – trading and generating alpha,” says the report. “Additionally, increased fund complexity and shifting sources of capital have created an incentive environment that is highly conducive to the outsourcing trend.” From a management standpoint, the hedge fund market is roughly 70 percent in the US, 20 percent in Europe and 10 percent in Asia, according to Stainrod. “The market is growing quickly in Europe and Asia, and many of those funds invest in US products. So it is truly a global market,” he says. But there are some signiﬁcant differences between North America and Europe, he adds. In Europe, it’s rare to see a hedge fund without an independent administrator, while many US 6 • Alpha Sponsored Report • October 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2008

Institutional Investor's Alpha Magazine - October 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Process of Evolution The Good Guys: Israel's Champion Interview: Fast Lessons for Hard Times Cover Story: Industry Under Siege The New Hedge Fund Economics Good-Bye, Easy Money Caging the Shorts Strategies: Bottom Fishing Profile: Cult of Personalities Research Center: Alpha Awards: Eye of the Storm Alpha Bytes: Funneling the Chatter Unhedged: Commentary: Attention, Hedge Fund Shoppers

Institutional Investor's Alpha Magazine - October 2008

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