The convergence of long-only and hedge funds has increased significantly in the last year.
In this regard, shared platforms for fund administration have led to year-on-year growth at single platform investment fund software provider Multifonds. Assets on the transfer agency side of the companys platform at the end of 2012 reached $1.4 trillion, 40% growth on 2011. The value of alternative funds with performance fee equalization, series and limited partnership structures on Multifonds platform has increased from less than $1 billion two years ago to $50 billion today, while the number of funds, including long-only and alternative funds, has also risen from 6,000 to 8,500 funds.
Keith Hale, Multifonds executive vice president for client and business development, says that as well as alternatives growth they also see large asset managers placing their middle office with their fund administrator, and the combination of investment accounting and fund accounting platforms.
Asset managers and administrators are seeing the value of one instead of two different software platforms for the accounting and investment record. Administrators, by having a single accounting platform, reduce the number of discrepancies and reconciliations between the investment accounting and the fund accounting.
The majority of our clients are fund administrators. We are helping their clients up the value chain by providing the efficiency of a single system to their middle and back offices.
Multifonds is also seeing increasing convergence of hedge funds and long-only funds. The institutional investors are increasing their allocations to hedge funds, and we are seeing the long-only, absolute return funds becoming more hedge fund oriented in their characteristics, such as performance fee and investor equalization, says Hale.
There is a significant drive in the industry from a commercial perspective to reduce the cost of administration fees for hedge fund managers in particular, says Hale.
Multifonds recent industry survey of 51 asset managers and fund administrators with combined assets of $16 trillion, found that AIFMD will lead to the convergence of the long-only and hedge funds.
The June 2012 survey found more than two-thirds (69%) of industry respondents, believed AIFMD will accelerate the convergence. 63% agreed that AIFMD will make Europe a more attractive jurisdiction for alternative fund investors and 72% thought that non-EU managers would set up European operations to take advantage of AIFMD.
The offshore market is coming to Europe to take advantage of AIFMD, says Hale.
It is likely that funds may re-domicile or co-domicile a Cayman or Delaware structure in Europe. The winners will be Luxembourg and Dublin due to their existing alternative and distribution experience. Luxembourg has good distribution but the labour costs are relatively high, so operational efficiency is key. Dublin on the other hand, has extensive experience in the hedge fund space with UCITS distribution but it is not as extensive as Luxembourgs.
Hale also notes a potential increased use of the Limited Partnership structure in Europe due to re-domiciliation in Europe.
Limited Partnerships are widely used in offshore and US structures for tax transparency reasons, but have more complex investor processing requirements such as allocation of incisive fees. Dublin and Luxembourg are both bringing LP structures for hedge funds into law this year, so there will be potential to take advantage of re-domiciliation of an offshore fund without having to re-structure the investors in the partnership into a unitized vehicle, for example.
Additionally, AIFMD and the depository liability may put up the costs of the alternative investment fund up significantly. The Directive also encourages investors to have external evaluations.
In an environment where the costs of implementing regulation are continually increasing, a single platform across multiple clients and administrators can help by aggregating the costs of software change. This is helpful when you see some asset managers spending 50% of their IT budgets just to keep up with regulation.
(JDC)