12/05/2006

6TH HFMWeek HEDGE FUND ADMINISTRATOR SURVEY

THE HFMWEEK SURVEY has again examined the strengths and weakness of the hedge fund industry, with 48 administrators sharing their news, views and figures with us.

Within the survey, the definition of 'alternative investments' refers to single- manager funds and funds of funds, excluding other investment vehicles such as private equity, venture capital, UCITS, SICAVS, SICAFS and OEICS.

In addition, in order to avoid the double counting of figures, the survey required respondents to split assets into single and funds of funds, providing two separate tables of results.

Contrary to the bad news some had predicted, single-manager funds' assets under administration (AUA) have increased 29% in the six months since our last survey, in November 2005, rising from $1.37trn to $1.77trn, with the number of single funds under administration growing by 45%, from 8,052 to 11,645. Funds of hedge funds (FoHFs) have also seen a sustained, if slightly inferior, period of growth, with AUA increasing 10% from $710bn to $781bn,and funds under administration increasing by 43%, from 4,149 to 5,933.

Looking at last November's top-10 administrators, there is no change at the top. CITCO Fund Services is once again first in the single funds results table, with AUA of $240bn, showing a healthy 16% growth over the past six months. The company took an impressive 13.7% of total single-manager fund AUA out of all participating companies, standing $90bn higher than its nearest rival in single fund assets, with the number of funds under administration increasing from 1,400 to 1,450.

William Keunen, director of fund services at CITCO, believes the hedge fund industry is increasingly driven by the investor community, with particular focus not just on fund performance, but also on how performance is being generated. Keunen notes many of CITCO's clients have recently delivered a period of strong performance, with the performance- related net asset growth exceeding capital inflow for the first time, a significant factor that simply cannot be ignored when evaluating the growth of the industry. With regard to concerns about the sector, Keunen says there is always the worry about a fund blowing up and the media attention it causes. In addition, the growing complexity of the industry and the diverse asset classes in which funds invest could result in a liquidity crunch if a major event causes market disruption. However, with respect to operational risk, he thinks the industry is now working more effectively to design processes, controls and checks and balances in areas such as "operations, asset existence and valuations to mitigate negative scenarios".

The top-10 administrators of singlemanager funds by AUA contain the usual suspects, with HSBC Alternative Fund Service's strong 31% growth to $149.5bn propelling it into second place from fourth in November 2005. IFS, a State Street Company, saw its position within the single funds table go up two places, from fifth to third, while CACEIS and GlobeOp both have become new entrants into the single funds top 10. CACEIS climbed three places to eighth position. SS&C Fund Services and UBS Fund Services just miss out on the top 10 in this survey, having been pushed back to 11th and 12th place respectively, from eighth and ninth last time.

Charlie Woolnough, business development manager of alternative fund services at HSBC, sees developments in technology as paramount to administrators' continued success. Woolnough says "technology which allows managers daily online access to balances, holdings and P&L information for their funds is now a requirement for many institutional managers. However, while technology can enhance efficiency in the areas of trade reconciliation and the automated pricing of OTC instruments, no amount of technology will every fully replace the need for human oversight. This is especially true with regard to complex funds. The creation of a global pricing and risking team, which focuses on the independent valuation of OTC and fixed income instruments, has been well received by existing and prospective clients and is proving to be a real competitive advantage." Additionally, he notes "transparency, as it is currently targeted on underlying investments, will be refocused on performance as increasingly educated investors begin to query what percentage of their returns are attributable to alpha as opposed to alternative beta."

Increasing regulation
Administrators appear to be benefiting greatly in the current regulation climate, with Robin Bedford, president of Dundee Leeds, commenting, "due to the increased regulation hedge funds are under, growing pressure to use a thirdparty administrator, combined with a thriving industry, has meant plenty of work for administrators, with funds making the decision to use a third-party administrator much earlier on in the start-up process." However, Bedford also warns, "administrators need to be able to adapt quickly to innovation within the industry, which is where medium-sized administrators have the advantage over the larger ones".

Technological advances appear top of all administrators' agendas, with many citing them as key to successful administration. All respondents who commented on the hedge fund industry's future growth and strategy singled out the importance of back-office operations, highlighting vast investment in IT platforms. Keunen believes technology plays a crucial role in enabling administrators to provide accurate and timely data to expedite a fund's risk management activities. However, he stresses, "while technology rarely provides a one-size-fits-all solution in today's market, it can provide scalability and is central to the considerations of new and existing hedge funds. Occasionally expectations of what a system can deliver can be too high, and this needs to be acknowledged by both hedge fund managers and administrators alike, with the ideal solution being a combination of partnering systems' capabilities with the expertise of both the manager and the administrator." John Alshefski, managing director of SEI's Investment Manager Services Unit, also sees technological advancements as important, but points out "it is going to become harder for administrators to differentiate themselves just based on their technology platforms, leading to the level of additional services, or 'value-adds' that managers will be searching for having to be raised to a higher standard."

The prospect of onshore hedge funds does not appear to worry many. Respondents indicated they can only bolster existing funds, with legislation taking the lead from administrators. However, Sean Flynn, head of hedge fund services at UBS, highlights the increased competition that onshore centres are likely to create for offshore administrators. "As more long-only managers and traditional financial institutions move into hedge funds, and as institutional investors increase their exposure to alternative assets, hedge funds will progressively become a more mainstream asset class," he says. "It is this type of conservative investor base that will shift preference to funds that are domiciled in an onshore regulatory framework."

Administrators appear divided over pensions in general, with differing views regarding their inclusion in the hedge fund sector. Bob Donahoe, managing director of BISYS Alternative Investment Services, sees the emergence of traditional institutions, bringing with them both pensions and endowments, as a bonus to the industry which can only lead to an increased acceptance of alternative funds. Flynn says investment by traditional institutions could lead to a "blurring of the lines between hedge funds and traditional investments".

Steady increases
The growth of hedge funds is a hot topic for many of our respondents, with most predicting steady growth within the industry over the next five to 10 years. David Aldrich, head of the securities industry banking division at The Bank of New York in London, suggests the flow of money into the alternative industry is increasing at a rapid rate, due to reallocation from institutional areas. However, he is quick to point out that investors are not just buying into hedge funds, but into the whole alternative investment industry, which will boom for the next five years in sectors such as property and private equity. Aldrich comments: "There will be a strategic change. The inflow of money is coming to the industry in size, and it is increasing in pace, so it is not a question of if, but when. Investors will always look for the best return from an asset class, and if the return does not happen fast enough in one strategy, or sub-sector, then they will switch their investment strategy into another sub-sector of alternatives. This will make the world a more exciting and dynamic place."

Dave Young, president of Spectrum Global Fund Administration, agrees, saying the hedge fund industry and administration businesses will "grow significantly" and also suggests that "hedge fund managers are more apt to switch administrators when they are unsatisfied with the quality of service, particularly in terms of the timing and accuracy of the deliverables".

Single Funds
COMPANY NAME SINGLE FUND AUA (US$bn) SINGLE FUNDS AUA (US$bn) GROWTH (%)
Rank Company Nov-05 Apr-06 Nov 05 Vs. Apr 06
1 CITCO Fund Services 205.00 240.00 17%
2 HSBC's Alternative Fund Services 114.55 149.50 31%
3 IFS, a State Street company 107.00 140.00 31%
4 BISYS Alternative Investment Services 127.00 134.00 6%
5 Goldman Sachs 107.00 125.00 17%
6 Investors Bank & Trust (Ireland) * 125.10 121.20 -3%
7 Fortis Prime Fund Solutions 94.00 103.00 10%
8 CACEIS Investor Services 35.83 83.25 132%
9 Globe OP ** n/a 80.08 n/a
10 Bank of New York 52.20 53.80 3%
11 SS&C Fund Services 50.00 53.00 6%
12 UBS Fund Services 41.00 51.49 26%
13 PFPC 31.34 46.69 49%
14 Butterfield Fund Services 25.87 37.40 45%
15 Olympia Capital 30.00 31.00 3%
16 DAIWA Securities Global Asset Services 19.18 29.47 54%
17 SEI 27.20 28.00 3%
18 Dundee Leeds Management Services 21.00 23.00 10%
19 Spectrum Global Fund Admin 15.10 20.90 38%
20 Euro-VL (SG GSSI) 7.60 20.00 163%
21 Admiral Administration Ltd 18.50 18.60 1%
22 Trident Fund Services 10.50 18.00 71%
23 Citigroup Global Transaction Services 11.10 15.90 43%
24 U.S. Bancorp Fund Services 11.20 14.66 31%
25 JPMorgan Hedge Fund Services 9.60 14.50 51%
26 Custom House Administration & Corporate Services 12.86 14.34 11%
27 RBC Dexia Fund Services 6.00 13.82 130%
28 CIBC 8.99 12.25 36%
29 Caledonian Fund Services 7.00 12.00 71%
30 Kaufman Rossin n/a 11.47 n/a
31 Fulcrum na 10.00 n/a
32 Northern Trust Global Fund Services 6.60 9.56 45%
33 Meridian 5.00 8.00 60%
34 Columbus Avenue Consulting 3.90 5.00 28%
35 Mourant (includes AIB Fund Administrators) n/a 4.54 n/a
36 ATC Fund Services 4.04 4.50 11%
37 Bank of Ireland Security Services 4.35 2.50 -43%
38 BNP Paribas Securities Services 3.77 1.64 -56%
39 Conifer Securities 1.50 1.53 2%
40 Folio Administrators 1.33 1.51 14%
41 IDS Alternate Fund Services n/a 1.20 n/a
42 Standard Bank Fund Administration n/a 0.95 n/a
43 The Nottingham Company 0.65 0.86 32%
44 Apex 0.53 0.77 45%
45 Close Fund Services 0.41 0.57 38%
46 Banque Privee E. De Rothschild n/a 0.55 n/a
47 Kingsway Taitz Fund Administations (AUS) n/a 0.04 n/a
48 Royal Bank of Canada 1.49 0.00 -100%
Total 1365.29 1770.04 29%
* figures as of 31/12/2005
** no new figures available

In the survey, 22 companies reported more than 20% growth in single-manager funds since the last survey, demonstrating a decline in the industry is not going to happen any time soon. Only four companies reported a loss in growth out of the 48 that replied to the survey.

Euro-VL (SG GSSI) recorded the highest growth in single-manager fund activity, increasing its AUA by 163% in six months, from $7.6bn to $20bn, with the number of funds under administration increasing from 186 to 470.

Multi-strategy funds
Credit Agricole (CACEIS Investor Services) was second in terms of growth, seeing its single funds business increase by 132%, from $35.83bn to $83.25bn. Vincent Beaujeu-Dumontel, international marketing and product development manager at CACEIS, comments that their figures may seem to have increased at a greater pace than expected, due to the company's recent move to consolidate all of CACEIS' administration business in one centre, which has propelled the company up the single funds table from 11th place last time to 8th place in the current survey.

Beaujeu-Dumontel adds that single hedge funds have increased significantly within the past few months, and highlighted the move within France to build relationships between depositories and prime brokers, which has contributed to CACEIS becoming one of the leading administrators in Europe.

He notes the emergence of multi-strategy funds within single funds, which gives "more flexibility to hedge fund managers" as well as highlights moves by hedge fund managers into more "original" funds, such as weather and credit derivatives. Beaujeu-Dumontel sees the outlook for the hedge fund industry as positive and welcomes the recent moves toward more strict regulation within Europe. He believes the move will make Europe stronger as administrators work more closely together.

Just behind Credit Agricole, in terms of growth, was RBC Dexia Fund Services, which showed a healthy a 130% increase in single funds. That propelled it three places in the results table by AUA. Out of the top-10 companies by AUA, all but one firm saw growth, with Investors Bank & Trust seeing a slight 3% decrease.

One of the questions on all administrators minds is whether FoHFs have had their day. With our figures showing a 9% growth in AUA since November 2005, from $709.52bn to $757.32bn, the question appear to be answered with a resounding 'no'. Aldrich, at The Bank of New York, expects FoHFs to double in size over the next 12 months "as there are still a great number of institutions with no current access to hedge funds who will favour such funds". Woolnough at HSBC agrees, arguing, "the FoHFs industry is evolving and seeking new ways to add value. We believe success will come through customised mandates, more concentrated


Funds of Funds
COMPANY NAME FoF AUA (US$bn) FoF AUA (US$bn) GROWTH (%)
Rank Company Nov-05 Apr-06 single
1 Fortis Prime Fund Solutions 104.00 112.00 8%
2 CITCO Fund Services 80.00 90.00 13%
3 HSBC's Alternative Fund Services 71.34 72.34 1%
4 UBS Fund Services 59.00 63.48 8%
5 SEI 40.80 47.00 15%
6 BISYS Alternative Investment Services 41.00 46.00 12%
7 IFS, a State Street company 53.00 35.00 -34%
8 Euro-VL (SG GSSI) 25.13 31.50 25%
9 PFPC 20.90 31.13 49%
10 Olympia Capital 24.00 25.00 4%
11 SS&C Fund Services 20.00 22.00 10%
12 Butterfield Fund Services 22.35 22.00 -2%
13 Investors Bank & Trust (Ireland) * 22.90 21.10 -8%
14 CACEIS Investor Services 13.59 20.58 51%
15 Globe OP ** n/a 18.68 n/a
16 BNP Paribas Securities Services 16.65 18.10 9%
17 Bank of New York 10.20 16.60 63%
18 RBC Dexia Fund Services 9.00 14.90 66%
19 Royal Bank of Canada 12.44 10.00 -20%
20 Spectrum Global Fund Admin 6.60 8.90 35%
21 Northern Trust Global Fund Services 7.78 8.06 4%
22 Banque Privee E. De Rothschild n/a 7.50 n/a
23 DAIWA Securities Global Asset Services 4.19 6.20 48%
24 Admiral Administration Ltd 2.50 4.40 76%
25 Custom House Administration & Corporate Services 4.35 4.78 10%
26 Trident Fund Services 4.50 4.00 -11%
27 Citigroup Global Transaction Services 3.50 3.80 9%
28 Caledonian Fund Services 2.00 3.00 50%
29 Close Fund Services 2.21 2.40 9%
30 Dundee Leeds Management Services 1.00 2.00 100%
31 Folio Administrators 1.23 1.59 30%
32 U.S. Bancorp Fund Services 1.50 1.57 5%
33 Kaufman Rossin n/a 1.00 n/a
34 Meridian 1.00 1.00 0%
35 JPMorgan Hedge Fund Services 0.36 0.70 94%
36 CIBC 4.31 0.64 -85%
37 IDS Alternate Fund Services n/a 0.58 n/a
38 Bank of Ireland Security Services 0.82 0.50 -39%
39 ATC Fund Services 0.20 0.37 88%
40 Apex 0.26 0.35 35%
41 Standard Bank Fund Administration n/a 0.01 n/a
42 Columbus Avenue Consulting 0.35 0.01 -97%
Total 694.95 780.77 10%
* figures as of 31/12/2005
** no new figures available

portfolios and niche products offering exposure to particular sectors and regions. Some FoHF managers will be asked to act in a consultative capacity and the challenge will be how they retain existing fee levels outside of the fund structure."

The results table for FoHFs shows Fortis leading the pack again, with a modest 8% growth in the past six months and funds under administration increasing from 768 to 802. Shenan Dhanani, senior business development manager at Fortis, argues FoHFs will continue to grow due to "institutions, especially pension funds, preferring the diversification offered by FoHF managers. FoHFs are becoming one of the few ways for investors to get exposure to hedge funds that are closed to new business."

CITCO continues its impressive performance by claiming second place in the FoHFs table, with 13% growth from $80bn in November 2005 to $90bn in April 2006. HSBC and UBS rank third and fourth respectively, with UBS increasing its position within the FoHFs table by six places from last November's 10th place.

Looking at the geographical split of assets under administration, there is little change from the last survey, with the US still the location of more than half of all hedge fund assets. Europe is the location for 24% of assets, with Asia, excluding Japan, taking 5%, and other locations 12%. The Isle of Man is one area that could be seen as a future stronghold for administrators, according to Richard Caley, business development manager at Abacus, a fund administration provider based on the island, as he sees it as being "increasingly recognised as a high-quality, high-value service centre of choice for international hedge fund managers."

Hedge fund manager locations, however, have seen change, with the US dropping to 57% from 62% in our last survey. Japan's share of hedge fund managers increased from 0.97% in November to 1.85% this time, showing a definitive shift to the country for managers. Not surprisingly, Cayman has again topped the hedge fund domicile list. However, the location has seen a decrease, accounting for 39% of all domiciled hedge funds compared to 44% last November. Jersey saw the biggest increase in activity, increasing its percentage share from 2.5% to 5%, a 98% growth rate. An 'other' category was also included within the domicile locations list once more and saw a significant growth rate, from 4% to 7%, a 92% increase, echoing views that emerging markets will see a strong growth rate in the coming months. Emerging areas highlighted within the survey have included South Africa and Australia.

It appears it is no longer the case that investors are excited about moving their investment to, for example, Eastern Europe. Investors are now looking to move to more exotic places with challenges expected to be faced every step of the way, such as sub-Saharan Africa.

So what does the future hold for hedge fund administrators?

Single-manager funds still appear to be most popular with investors. Keunen at CITCO attributes their strength as paramount to CITCO's success. He also highlighted the re-emergence of long/short equity as a strategy, an observation shared by both Donahue at BISYS and Beaujeu- Dumontel at CACEIS. Flynn at UBS stresses the importance of staff as imperative to the success of any administrator, both in terms of hiring the right people and in being able to retain them.

Flynn comments administrators "must have staff who know what they are doing, and have the specialised skills and detailed knowledge to provide a high quality, accurate and timely service to clients".

The recent call for transparency within the US also appear to be welcomed by many administrators, with Dhanani at Fortis speaking for many with his view that, "greater transparency is, and will continue to be, required in this industry. Investors, especially institutions, will demand it. The challenge facing administrators is to continue to provide such services efficiently and accurately by investing in the technical and human resources required."

Adds Bank of New York's Aldrich: "There are two distinct areas of change and they will pose a challenge for everyone in the investment lifecycle. There will be an increase in the innovation of products and an increase in the exploration of new markets. The job of the hedge fund manager will be to find these new places first and beat the competition.'

Donahoe puts the future of hedge fund administrators into context. "In the end, strategies come in and out of fashion," he says. "An administrator has to focus on the whole market to be successful.

Single Fund Growth

COMPANY NAME SINGLE FUND AUA (US$bn) SINGLE FUNDS AUA (US$bn) GROWTH (%)
Nov-05 Apr-06
Euro-VL (SG GSSI) 7.60 20.00 163%
CACEIS Investor Services 35.83 83.25 132%
RBC Dexia Fund Services 6.00 13.82 130%
Trident Fund Services 10.50 18.00 71%
Caledonian 7.00 12.00 71%
Meridian 5.00 8.00 60%
DAIWA Securities Global Asset Services 19.18 29.47 54%
JPMorgan Hedge Fund Services 9.60 14.50 51%
PFPC 31.34 46.69 49%
Apex 0.53 0.77 45%

Fund of Funds growth

COMPANY NAME FUND OF FUNDS AUA (US$bn) FUND OF FUNDS AUA (US$bn) GROWTH (%)
Nov-05 Apr-06
Dundee Leeds Management Services 1.00 2.00 100%
JPMorgan Hedge Fund Services 0.36 0.70 94%
ATC Fund Services 0.20 0.37 88%
Admiral Administration Ltd 2.50 4.40 76%
RBC Dexia Fund Services 9.00 14.90 66%
Bank of New York 10.20 16.60 63%
CACEIS Investor Services 13.59 20.58 51%
Caledonian 2.00 3.00 50%
PFPC 20.90 31.13 49%
DAIWA Securities Global Asset Services 4.19 6.20 48%

Assets & Manager Splits - April 2006

ASSETS LOCATION SPLIT (%)
USA EUROPE JAPAN ASIA (ex Japan) OTHER REG
58.64 23.58 1.63 5.39 10.77


MANAGER LOCATION SPLIT %
USA EUROPE JAPAN ASIA (ex Japan) OTHER REG
56.82 31.74 0.97 4.33 6.13


Domiciled Funds - Locations

Apr-06
Bahamas Bermuda BVI Cayman Curacao Guernsey Hong Kong Ireland Isle of Man Jersey Luxembourg US Singapore UK Other
0.64 7.50 8.75 39.47 0.33 5.17 0.46 4.12 0.19 5.05 5.00 15.91 0.11 0.31 6.99

Nov-05
Bahamas Bermuda BVI Cayman Curacao Guernsey Hong Kong Ireland Isle of Man Jersey Luxembourg US Singapore UK Other
1.38 13.42 6.27 43.88 0.50 4.30 0.51 5.45 0.26 2.56 7.00 10.57 0.06 0.20 3.65