The Importance of Stability in the Evolving Hedge Fund Administration Market
By Stephen Lewis, Maples Fund Services
In the wake of a number of recent acquisitions in the hedge fund administration market, including Citigroup’s decision to sell its Alternative Investment Services unit to SS&C Technologies, there has been a general sense of uncertainty for buyers of administration services. While some service providers are seeking to capitalize on the uncertainty the current environment presents to cement their reputations as consistent and stable players, others are questioning the viability of their business models altogether, potentially leaving hedge fund managers and their investors vulnerable.
There are a number of factors that play an important role in the success of a hedge fund, not least of which are the service providers a fund chooses to engage. Whereas previously, service providers were simply required to be timely and accurate, today’s fund manager demands a more robust, comprehensive offering. Fund administrators must have a deep understanding and appreciation of the proprietary elements of the systems and operational needs that set managers apart. Additionally, they must move beyond the traditional service provider role to foster meaningful long-term relationships and become a true extension of a client’s operations to add value to the investment decision-making process.
Given the demand and expectation for these high-touch relationships, many of the larger providers of fund administration services are beginning to more closely examine their bottom lines and weigh the cost versus the profit of servicing a particular fund. Inevitably, these administrators will become more selective about the size and level of activity they need to see before engaging with a fund and may be forced to shed at least some of their small to mid-size clients given current market dynamics.
Fortunately for some of the smaller funds and new launches, there is a growing segment of mid-sized fund administrators that can provide them with high levels of service at a lower price point to support their entry into the market. However, selecting a hedge fund administrator requires careful thought and consideration.
First and foremost, fund managers should focus their search on reputable players who can provide high quality service and a high-touch experience. Investors and regulators are demanding greater transparency and operational efficiency from fund mangers and as a result, fund managers need customized and cost-effective solutions that create value, enhance effective management and allow them to make informed decisions.
It’s also important for funds to consider their future growth and evolution and how the service providers they engage with can continue to support them as their needs change. A new launch may simply need a basic set of services whereas a larger, more established fund will likely have more sophisticated needs. An administrator that provides a comprehensive core offering that can be customized with other ancillary services can be quite attractive and is one that can more readily support a fund as it grows.
Perhaps most importantly, a relationship with the right fund administrator should foster trust and confidence. Recent industry consolidation has prompted questions from fund managers who are curious about the potential direct or indirect impacts on their business.
Service providers who demonstrate long-term stability and a commitment to the provision of fund administration services can help allay these concerns. Ultimately, this relationship should seek to absorb as many of the fund manager’s operational pain points as possible so that he can focus on his core competencies and singular goal of generating alpha for investors.
Stephen Lewis is Maples’ European Head of Business Development. He is based in London and is responsible for expanding the fund administration and middle-office businesses across the firm’s European offices.
