24/08/2011 Author: Will Wainewright

Keeping afloat

It has been a shaky summer for the hedge fund industry, posing risks for service providers whose fortunes are largely intertwined with those of the funds they work with. HFMWeek spoke to fund administrators for an update on how the sector is faring

While investors and the hedge funds who manage their money would seem the obvious victims when markets shudder, spare a thought for the providers servicing the industry. For fund administrators, whose fees are largely based on the amount of assets they administer, the pinch felt when funds falter can be particularly acute. So how has the industry been affected over the last few months?

“The sector hasn’t been affected by volatility in an operational sense,” says a manager at one mid-sized admin firm. “Markets have been volatile but no hedge funds have gone down.” This is obviously the main comfort for providers always wary of counterparty risk. However, there has nonetheless been a definite impact in terms of fees.

“The majority of the fees charged by the industry are based on assets under administration (AuA), so if hedge funds get hit then the sector is affected,” says Oliver Scully, managing director at Citco Fund Services, ranked top in this year’s HFMWeek AuA survey. As well as the fortunes of their clients, the extent to which different admins gets hit depends largely on their size, with some smaller admins able to escape the brunt through having more minimum fee arrangements in place.

“The bigger the fund, the smaller is the percentage of total revenue represented by minimum fees, which obviously means that larger administrators with bigger clients may be less protected in tougher times,” points out Peter O’Dwyer, a director at Trinity Fund Administration. He adds that Trinity also has a more diversified revenue model, which includes charging by the hour for ancilliary and support services and is thus less impacted by falls in AuA than competitors who are merely bp driven. It just shows how unevenly the sector will have been impacted by the uncertainty, making it difficult to draw uniform conclusions.

There is an equally mixed picture in terms of admins winning new clients. Joan Kehoe, CEO at Dublin-based administrator Quintillion, says they have been very successful in winning mandates from managers working with “non-correlation strategies, which of course are very popular at the moment.” Tellingly, they have added more new clients in this area than in more traditional sectors recently.

Where else are admins currently looking for new business? Citco’s Scully says the trend in the US of self-administrated funds moving to third-party administrators has continued to help them. His company is also working hard to gain business in less traditional growth areas. “We are seeing large family offices and endowments with restricted internal operations. They struggle with operational capacity and are coming to outside administrators,” he says. Family offices, while nothing new, are increasingly looking to start taking in outside money and seeking help to match their operational side to their asset management capacity.

Kehoe of Quintillion says it is hugely important to concentrate on relationships with existing clients. “As our business has matured we continue to win new mandates from existing clients and they have also become a very valuable source of referral for new business opportunities.”  Other admins, like GlobeOp, are trying to win new business, and revenue, by offering additional reporting services – particularly those that can tap into the current regulatory needs of clients.

This week, the FTSE-listed administrator launched a new venture for funds affected by the upcoming SEC deadline for private fund (Form PF) reporting. “By efficiently gathering data and drafting reports for client review and submission, we can help our clients meet regulatory obligations, save time and reduce investment in internal resources,” says Tony Glickman, GlobeOp’s global head of analytics. Providing as diverse a range of services as possible is key when times are tough, and Citco’s Scully says that preparing financial statements is something that all admins will work on more. “And it will continue this year, especially as regulation becomes more burdensome,” he adds.

Though the picture is mixed, the message is clear: all admins will be working hard to diversify income streams and win new business, especially given the increasingly dog-eat-dog nature of the service provider sector. Bluecrest’s partial move to HSBC has shown that hedge funds are no longer reluctant to take on new admins, which will have further put the sector on edge. Retaining clients and, if possible, winning new business has never been more important.