24/11/2010 Author: Kapila Gohel

15th HFMWeek AuA Survey - single manager

The second HFMWeek AuA Survey of 2010 shows a hedge fund sector that has built on the growth seen six months ago, with a steady increase in assets under administration, but the effects of the financial crisis are still making their presence felt with increased regulatory pressures and consolidation in the admin space. Read on to see which administration firms top the single manager rankings.

Click here to download a PDF of the full rankings tables

Having accelerated through the early stages of the recovery, the hedge fund industry has now geared down to a steady pace. In the past six months, single manager hedge fund assets under administration (AuA) have climbed 6%, taking assets to $2.81trn and signalling a stabilisation in the healing process.

The results of the 15th HFMWeek Assets under Administration Survey finds single manager AuA edging back comfortably towards the highs of April 2008 – when hedge fund assets peaked at $2.93trn for single manager funds.
As investors regain confidence in the space, the hedge fund industry has increased its deployment of innovative structures, including managed accounts and Ucits, to satisfy investor demands for regulation and transparency, as well as increasing the use of third-party administration.

In the UK at least, hedge fund start-ups in the third quarter of 2010 were the highest since the collapse of Lehman Brothers in September 2008, according to IMAS’s third quarter FSA Review, a sign of recovery from the events of that period.

HFMWeek's survey gathered results from the majority of global fund administrators, representing more than 90% of the industry, revealing the industry trends and issues for the past six months and the factors still propelling the sector into 2011.

Citco Fund Services, the largest administrator by far, standing $190bn in AuA above its closest peer, State Street Alternative Investment Solutions, has reported an 8% growth in the past six months, to $475bn in total.
William Keunen, director of Citco, states: “Hedge fund assets have benefited by growth on almost all fronts, including good performance over the last three-to-four months, net new capital inflows and increased start-up activity, with the larger, well-established hedge fund groups benefiting the most.”  

He added that, rather than any groundbreaking trends, Citco believes the steady increase in institutionalisation of the industry is quickly gathering momentum, in the form of increased demand for data, transparency and operational integrity.

Taking into account a consolidation with OpHedge in May this year, Citco’s single manager AuA now amounts to almost 17% of total single hedge fund AuA, the largest share of the industry. Meanwhile, the top ten largest hedge fund administrators features the same names as April’s survey, some, however, have changed their position in the rankings.

London-based GlobeOp Financial Services posted a 21% rise in assets, seeing the firm displace HSBC Securities Service as the sixth largest administrator. However, as a publicly-listed company, the firm’s assets cannot be split.
According to Hans Hufschmid, chief executive officer at GlobeOp, managed accounts have become increasingly attractive as a solution for investors interested in the greater capital control and portfolio transparency they can offer. In fact, the firm currently serves major platforms such as Lyxor Asset Management and Lighthouse Investment Partners.

Of all the administrators surveyed, the firm to post the highest organic growth, of 194%, is HedgeServ, a firm launched in 2007 by former founders of International Fund Services (IFS), which was acquired by State Street as its administration arm in 2005.

“All our growth has been organic,” says Jim Kelly, CEO and founder at HedgeServ. “We have a technology platform that’s totally different to anyone else’s which has great functionality and is particularly suitable for managed accounts.” He added that the firm’s team has been a factor in its growth, with many of the former team from IFS moving to HedgeServ.

Other administrators that have witnessed a hike in assets due to recent consolidation are large administrator Bank of New York (BNY) Mellon and mid-size firm Equinoxe Alternative Investment.

BNY Mellon’s acquisition of PNC Global Investment Services has increased assets 32% to $261.8bn. However, Robert Lockhart, business development manager at BNY Mellon revealed the firm has also experienced a considerable amount of organic growth. “We have enjoyed some very good single manager mandate wins over the past six months, new launches by existing clients as well as seeing some particularly strong performance in South America,” he says.

Most firms expect further consolidation within the industry. “The process is already underway,” says Hufschmid. Lockhart agrees – further regulation and continued political intervention will drive further consolidation within the industry, he argues. “Likewise, the bifurcation of the administration industry will continue to unfold. The larger administrators will continue to add scale and the market for boutique operators remains valid. The 'middle ground', however, remains a precarious position within the industry.”

Regulation will indeed have an impact on the industry going forward, particularly with the passing of the AIFM Directive in the third quarter.

Despite expecting a rise in fund launches early next year, the costs that invariably arise with additional regulation are likely to cause a decline in new fund launches when the Directive comes into effect, says Charlie Woolnough, regional director, sales and relationship management, at Prime Fund Solutions, part of Credit Suisse. “As an institutional administration provider we believe that we already have the processes in place to ensure full compliance with all of the AIFM provisions for administrators. We are currently developing additional services to help our clients navigate the directive successfully,” he notes.

“There will undoubtedly be more reporting and compliance,” says Keunen. “But most funds are already positioning themselves for a more regulated environment so do not feel unduly threatened. We have expanded our asset servicing capabilities to meet the demands of a more regulated industry.”

According to Keunen, the worst of the financial crisis appears to be behind us and the majority of hedge funds are generating above water-mark alpha once again. “Investors in traditional asset classes are now taking a serious look at alternatives,” he says. “Asset servicing is evolving beyond traditional silos such as prime brokerage and administration – so a service-level status quo is really not an option.”
While regulation will be a big factor going forward, possibly more important will be the investor requirements that will have more of a say about who the service providers of hedge funds are. “There is very capable investment talent in the hedge funds space, along with current technology and positive performance over time,” says HedgeServ’s Kelly. “Anecdotally, general consensus seems to be that all assets from the traditional investment space will migrate to hedge funds over time.”