22/06/2011 Author: Will Wainewright

Global approach

HFMWeek talks to GlobeOp CEO Hans Hufschmid about the administrator’s recent growth, the impact of its move to India, and the lessons he has learned from working in the hedge fund industry

Hans Hufschmid is impressively laid back for someone running a company with over 1,900 staff spread over three continents – and it’s not hard to see why. GlobeOp, the fund administrator in which he has a 13.2% shareholding, is doing well at the moment, as evidenced by a soaring share price and strong recent growth figures. Eleven years after its launch, the technology-focused company is in rude health. A lot of people are asking whether, having grown organically to date, this could be the ideal moment for a spot of M&A.

“We have the best platform out there and are ideally suited to do acquisitions, but so far nothing has happened on that front,” explains Hufschmid, at GlobeOp’s Trafalgar Square headquarters. “[But] acquisitions are part of our corporate strategy.” So why no moves so far? “We’ve looked at quite a few [small admins] and they tend to not be profitable. We don’t really have an interest in their technology. We really are only interested in their clients, and the hassle is probably not worth it to acquire these small ones,” he says.

GlobeOp has not exactly done badly out of organic growth – assets under administration (AuA) grew from $139bn to $167bn between October and April, placing them sixth in HFMWeek’s single manager AuA Survey this year. The firm would surely be an ideal target for a bank or bigger rival; so what would the company’s response be if a buyer came calling? “We are always in the business of maximising shareholder value,” says Hufschmid. “Right now we feel that’s best done by us growing the business organically. If at some point in the future it might be best done by being acquired by someone bigger, so be it.”

Whatever the future holds for GlobeOp, it would take a lot to faze the 55-year-old Swiss. When it comes to hedge funds and finance, he has seen it all. After studying in California, he spent nearly a decade in the competitive environment of Salomon Brothers before joining Long-Term Capital Management, where he observed first-hand one of the biggest blow-ups in hedge fund history. He has been GlobeOp’s CEO since its 2000 launch, and guided the company onto the London Stock Exchange in 2007.

GlobeOp’s share price sums up the company’s rise. Currently hovering above the 400p mark, it has risen impressively since its 2008 low and has almost doubled since September alone. What’s more, industry analysts say GlobeOp is still undervalued by the market – Collins Stewart believes 600p would be a fairer valuation. “Their strong position comes from a combination of high levels of recurring revenue, an operationally geared business model and strong market position in a structural growth market,” says analyst Jonathan Imlah.

Strong figures underpin the company’s performance. Revenue grew from $156.5m to $189.3m in 2010, delivering a net profit of $33.7m. Hufschmid’s salary including bonus and add-ons rose from $313,000 to $1.33m over the same period, with New York-based COO Vernon Barback collecting $1.16m.

The fact that GlobeOp ended 2010 with $73m of net cash, a figure forecast to double over the next two years, perhaps shows why acquisition rumours abound.

How to explain GlobeOp’s success? Moving the company into India in 2003, taking advantage of the educated workforce and the time difference, which means GlobeOp can service funds round the clock, was key. “If we hadn’t gone to India, we would not have a profitable, scalable high-quality business today. There is no question in my mind about that,” says Hufschmid. Two thirds of GlobeOp’s workforce is now based in the country.

But GlobeOp is not without its detractors. Not everyone in the industry applauds their emphasis on technology, a common complaint being that the company’s size and tech-focus drags down the quality of their core fund admin offering. “McDonalds make a lot of food but they’re not the best restaurant,” one rival remarks. Hufschmid does not agree: “I think technology is very helpful in performing routine tasks accurately and consistently. Technology is very important for us, to monitor what we need to do for our clients and how we actually do it for our clients.”

But does this come at the expense of a people-focused approach? “The people component is a very important part of our business too,” Hufschmid adds. “We have 1,900 employees globally – we’re not doing everything with technology. The technology needs to be serviced by people, we need people to communicate with clients.”

Criticism from rivals is unsurprising, given GlobeOp’s solid growth in recent years, which suggests the advanced technology offered by GlobeOp has a solid and growing customer base among hedge funds. Hufschmid says its complex offering means the firm works with a higher proportion of complex strategies compared to other admins. He adds that customer satisfaction has long been a central objective of the company, with in-house surveys recording an increase from 55% to 95%.

Equally important to Hufschmid is reassuring investors when it comes to due diligence and other operational issues that have been in the spotlight recently. He says they have taken the step of inviting investors into their offices to do due diligence on them directly. He is also keen to highlight GlobeOp has the “most comprehensive” SAS 70 type-II, an annual independent audit of the company’s middle-, back-office and fund administration controls and transaction solutions. Just as the move to India put them ahead of the game, Hufschmid clearly thinks that taking as many steps as possible to reassure investors can keep them there.

“When you invest in hedge funds, you invest in small businesses,” he says. “You think of a $20bn hedge fund as a large hedge fund, and it is, but it’s still a relatively small business. It’s driven by one or two or three individuals and so it’s important to make sure that you do proper due diligence.”

He isn’t afraid to admit that GlobeOp has picked up a great deal of business through this. “Post-Madoff in 2008, investors took a much, much bigger interest in what their funds were doing and who the administrator was. There’s been a lot of pressure on the big funds with small administrators to move to a major administrator, and we’ve won quite a lot of business that way.”

When discussing GlobeOp with Hufschmid it is easy to forget the remarkable career he had beforehand. Few careers can have tracked the recent history of the hedge fund industry in such a varied way, and his time at Long-Term and, in particular, Salomon had a massive impact on his work at GlobeOp.

“[Salomon had a] very entrepreneurial, risk-taking, defined culture and I felt at home in that culture.” The influence on him is obvious – he calls Salomon his “mother employer” – but it was not for the faint-hearted. Anyone who has read Michael Lewis’s Liar’s Poker, which draws on the author’s experiences as a bond trader at Salomon in the Eighties, will have an idea of the aggressive, testosterone-fuelled atmosphere that prevailed on trading floors at the time. But it was the making of Hufschmid, who rose to head of global FX trading and sales, before following a swathe of others from Salomon to join Long-Term Capital Management in 1994.

The history of that particular hedge fund manager is well documented. After initially delivering huge returns, its prize fund crashed in 1998 and required a multi-billion dollar bail-out from the rest of Wall Street. It is history’s textbook example of the systemic risks posed by over-leveraged hedge funds, though Hufschmid, who served on Long-Term’s risk management committee, is quick to counter overt criticism. “Long-Term was a very successful fund apart from the last four months,” he says. “People forget that, but it generated enormous returns by today’s standards for quite a while. If an investor had come in on day one they would still have had a positive return despite losing 90% of the capital at the end.”

Whatever the rights and wrongs, Hufschmid believes his time at Long-Term was not without its benefits: “One of the things it definitely taught me is you should always become very suspicious of success,” he says. “You almost have to have a sense of paranoia actually about your own business. The things you know are problems, they’re the things you can manage and deal with. It’s the things that you don’t think of that are going to get you.”

This brings us onto the difference between trading and running a business. “[The difference] is really time, in my view. In other words, trading decisions you can get pretty instantaneous feedback on, or it might be days or weeks, but in running a business you take decisions that might not pay off until two, three years down the road.” He continues: “I look at some of the decisions that we made at GlobeOp, and if we hadn’t made them at the time, we would definitely not be where we are today. One of those decisions was going to India.”

He adds that management structure can have an important impact on the success of any venture, whether a hedge fund or service business. “Long-Term was a business managed by committee and I don’t think that that is really a good thing to do,” he says. “If you look at successful businesses they have some sort of autocratic leadership.”

That certainly seems true of GlobeOp, which appears to be in robust shape under Hufschmid’s leadership. “The one thing here that is very gratifying is having built the business that feeds 1,900 people and their families,” he says, “something that is really going to be here when I’m not. That to me is probably one of the most gratifying things.”

And what about the hedge fund industry in general –  where does he think it is headed? “If you want to look at the hedge fund industry in the future, you should probably look at the mutual fund industry today,” he says, explaining that as more institutions turn to hedge funds, they will start to resemble more conventional money managers. Falling fees will be one result, he predicts, warning that hedge funds should not rush to retail investors at the same time. “They are really not designed to be the daily liquidity investment which a lot of people clamour for today.”

Hufschmid is bullish on GlobeOp’s future. “We are a growth company, we act like one, and we certainly expect to continue to be a growth company for the foreseeable future.” How far he can take them remains to be seen – but, despite his relaxed demeanour, he and GlobeOp seem in no mood to sit back at the moment.