The new leadership of the recently reorganized hedge fund servicing businesses at BNY Mellon – formed in January this year under the leadership of EVP Art Certosimo to combine the hedge and private equity fund administration businesses of Bank of New York and Mellon [see “BNY Mellon rises to the hedge fund challenge,” GC, Winter 2007, p.52 or click here] – has today announced its first acquisition. The bank has purchased LAMP Technologies LLC, a Dallas-based fund of hedge funds administrator. LAMP brings a small clientele to the bank but BNY Mellon emphasises that the real reason for the acquisition is not its book of business, but its technology, and especially its reporting capabilities.
The reporting requirements of funds of hedge funds are notoriously complicated, not least because a third party intermediates managers and investors, and pricing entails monitoring multiple underlying funds. “People used to think funds of funds were a simpler space to be in,” says Rick Stanley, head of product management within BNY Mellon Alternative Investment Services (AIS) in New York. “But most people have now learned that there are specific and complex requirements in the fund of hedge funds space, because you are investing in the underlying managers, and those types of structures and master-feeder structures have their own complexities in getting the information back from the fund to the sponsor and the investors.”
In fact, LAMP Technologies itself was founded in 1997 by a group of people reared in the managed futures business, who had assumed that funds of hedge funds would be relatively straightforward by comparison with derivatives-based funds. “As they set up the business in the 1990s, they learned very quickly that was not the case,” says Stanley. The solution of the LAMP founders was to form a partnership with a major fund of hedge funds group – its identity is not being disclosed, though it remains a user of the technology – on the basis that, if they could satisfy its requirements, they could meet the needs of others too. “They then took the platform, and started to offer it as a third party administration service,” explains Stanley. “Their business model is third party administration, not licensing the technology to third parties.”
However, acting as a third party administrator to funds of funds group proved a tough call without either a large balance sheet or a banking licence to supply the execution, custody, cash management, credit, leverage and foreign exchange services required. “They had a lot of pipeline conversations, but found they could not close deals unless they partnered with other entities in order to offer the comprehensive range of capabilities funds of hedge funds clients wanted,” says Stanley. “It made it hard to maximise the potential of what they had built.” This explains the decision, taken by the LAMP founders late last year, to sell the company to BNY Mellon.
The price is not being disclosed but six of the LAMP principals, including CEO Aladin Abughazaleh, are joining BNY Mellon. “By becoming part of BNY Mellon, clients will now have a single, comprehensive source for their complex and evolving investment servicing needs,” says Abughazaleh. “Fund of hedge fund managers will greatly benefit from the extensive range of services they will be able to access on an integrated basis, including a market-leading web-based reporting tool for fund assets which will provide the level of transparency that our clients need.” For BNY Mellon, on the other hand, the purchase clearly signifies that AIS has identified funds of hedge funds as a major axis of growth – indeed, the bank expects the acquisition to accelerate its speed to market. Despite their high cost structures, funds of funds have remained the investment vehicle of choice for institutional investors keen to access alternative investment strategies but short of the confidence, internal resources and expertise to choose single or multi-strategy hedge fund managers themselves. “Institutional investors are looking to diversify risk, so they want to be in hedge funds,” adds Stanley. “But they are concerned about headline risk too, and investing through funds of hedge funds is a way of managing that risk as well. In fact, since the credit crunch bit last August, we have seen a renewed level of interest in funds of hedge funds, not least because of the greater transparency and diversification they offer.”
Knowing the positions held by the underlying hedge fund managers has certainly enhanced the appeal of funds of hedge funds since the first hedge funds began to implode last summer. So it is not surprising that BNY Mellon has grown its assets under administration on behalf of funds of hedge funds clients by 20 per cent in the first few months of 2008. Stanley says the bank expects the hedge fund sector as a whole to add another $600-700 billion in institutional investments over the two years to 2010. “We are aiming to become a top three player in alternative investment servicing, and we see funds of hedge funds as a tremendous opportunity, especially with the volume of institutional monies flowing into them,” he says. “And with those flows come greater transparency needs.”
Delivering that transparency for funds of hedge funds clients of the bank, says Stanley, is what the LAMP technology is all about. LAMP technology allows users to look at hedge fund data on-line, on a customisable basis, at the fund, investment strategy, manager and investor levels. It includes management and performance fee calculators that users can set to match their own fee schedules, current and historical price collection and storage capabilities, and pre-publication tools that enable fund of hedge fund managers to review fund accounting data before it is finalised. Similarly, investors will benefit from estimates of returns on underlying funds before they are finalised at month- or quarter-end. “LAMP enables us to match our technology to the specialized reporting requirements of funds of hedge funds,” says Stanley. Importantly, BNY Mellon funds of hedge funds clients will be able to private-label the LAMP technology. “Fund of hedge funds sales people will now be able to sit at their desk, turn on to the web, and pull up investor level information as they speak to the investor on the `phone,” says Stanley. “This technology puts tremendous information flow at their fingertips.” The LAMP acquisition also fits with a revamped technology strategy at AIS, which is aiming to develop specialised technology platforms for single strategy hedge fund managers, funds of hedge fund managers, and private equity fund managers. “We are doing more specialisation around our technology platforms to enhance the client experience,” explains Stanley. Art Certosimo himself describes the acquisition as evidence of “our commitment to offer clients state-of-the-art technology, customized service solutions, and expanded reporting capabilities.”
BNY Mellon AIS currently has just over $200 billion in hedge fund and fund of hedge funds assets under administration.