Giles Turner, news editor, interviews Hans Hufschmid, CEO of GlobeOp, about diversification in the fund administration business, and the benefits of working for Long Term Capital Management
Hans Hufschmid, CEO of fund administration business GlobeOp, has every reason to be pleased with the firms interim results for 2010. Assets under administration increased 10% in first half of 2010 to $120 billion, compared to only a 1.15% increase in hedge fund assets from Q4 2009 to Q2 2010, according to the BarclayHedge index. Revenues grew 13% to $89.4 million versus $79.2 million in first half 2009.
But despite beating the hedge fund benchmark, GlobeOp has been busy diversifying its product range, most notably with the lift-out of investment management operations outsourcing services for European Credit Management (ECM), a specialist asset manager and subsidiary of Wells Fargo & Company with approximately 12.1 billion ($15 billion) in assets under management. Beating 14 rivals for the business, the lift-out was the first of its type attempted by GlobeOp, and a significant piece of business to win. We are very well known in the hedge fund industry, but in the pension, insurance and corporate treasury industries, we are not all that well known, says Hufschmid.
Along with ECM, GlobeOp has diversified through a mandate to provide Promark Global Advisors, the asset management arm of General Motors, with independent valuation assessment services across a portfolio of more than 20,000 unique securities. Transaction Solutions, which includes valuations, OTC processing and GoMarkets, is a fairly nascent business and we hope to grow that over time. Promark started to generate revenues in the last part of 2009, he says.
GlobeOps desire to diversify may perhaps be down to Hufschmids caution not to put all his eggs in one basket. Throughout his career, he has watched some of the largest financial dramas play out in front of him. Working as global head of foreign exchange sales and trading, and member of Salomon Brothers credit committee in the 90s, Hufschmid was eventually part of the Salomon team that set up Long Term Capital Management.
The rest, like LTCM, is history. In 1999, one year after the funds collapse, Michael Lewis, the appointed chronicler of Wall Street meltdowns and former Hufschmid classmate at Salomon, wrote an extensive and damning account of the fund and its partners in the New York Times, stating that: In the complex case of Long-Term Capital it has been worse than usual. Reputations are ruined, fortunes lost and precious ideas simultaneously ridiculed and stolen.
After founding GlobeOp in 2000, along with ex-Salomon and LTCM employees Ron Tannenbaum and Ira Rosenblum, Hufschmid may well be tempted to remind Lewis that a lot can change in a decade, but he is keen to note what LTCM passed onto to GlobeOp. We went through, as a hedge fund, the whole gamut from starting out, doing very well, growing very fast, being very big, then collapsing, being under stress, he explains. We had all aspects of hedge fund experience, and that has been very helpful talking to our clients because when you start out, the one experience you dont have is being under pressure. Life is a lot different when you are under pressure from your creditors and your investors. That was certainly a good experience in building GlobeOp. From an operational perspective LTCM worked really well. We had at the extreme $500 million worth of capital and a $100 billion balance sheet, and it had to be financed every day so you had to run an extremely tight ship because you had to pay out a lot of money and receive in a lot of money. You dont have a lot of room for error when you only have $500 million in capital on a $100 billion balance sheet.
The nature of hedge fund growth has also posed a challenge. Smaller hedge funds tend to use excel models and macro tools, growing to centralised trading platforms and significant technological expenditure. This discombobulated nature of expansion became a significant expense to hedge funds as assets shrunk. Experiencing the highs and lows of LTCM has allowed Hufschmid to pick up on a new trend in hedge funds: It is more than just saving money for them. When a fund grows it is fairly easy. You get bigger offices and more employees, and your cost base goes up and up. For example, when your assets drop from $5 billion to $1 billion, you have this huge infrastructure that you built up over time, and now it is becoming a cost issue for you, because you only have $1 billion, and you are very likely below your high-water mark at the same time. A lot of people went through this experience in 2008, 2009, and one way to deal with that is variablize your costs by outsourcing to someone like us, who charges more when they are bigger and less when they are smaller. he says.
Diversifying revenue streams may keep shareholders happy, but offers different challenges for GlobeOp, one of the major independent players left in an ever consolidating fund administration industry. Hufschmid denies having been approached for a potential sale: We have a very attractive business model, but we are not looking, and if you dont look today, you dont get asked out, he says. It is also clear that some clients may wish GlobeOp to keep its independence, especially when lift-outs and operations outsourcing services are involved. Right now we are independent and a publically traded and listed company. Im sure if we were bought by certain companies, clients might have issues. These are questions that you have to be comfortable with.
While Hufschmid may be well placed to offer advice to hedge funds clients, hedge fund investors, so often a relatively private group, have become increasingly vocal. Madoff and Lehman Brothers have left deep scars in the investor psyche and Hufschmid notes that due diligence requests from hedge fund investors increased by around 40% in 2009.
But GlobeOp is not immune to being caught up in due diligence issues. The administrator agreed to settle a lawsuit with Archeus Capital Management in 2007, just prior to the firms IPO. Archeus collapsed in 2006, and claimed GlobeOp made a series of accounting errors leading to its demise. More recently, investors of Fairfield Greenwich Group, a hedge fund that invested $7 billion with Madoff, have sued GlobeOp, along with Citco Bank Nederland NV, Citco Fund Services and Fairfields fund managers, for failing to conduct due diligence on Madoff.
Hufschmid commented that litigation risk is just the nature of our business, unfortunately. But regardless of the merit of the lawsuits, such experiences have taught GlobeOp to be strict with clients. Today, GlobeOps contracts include a fee for trade data corrections made after the trade date. The typical structure for this fee allows for a threshold with no fee and an incremental charge, typically $50, for items above the threshold.
Presuming the ECM deal is a success, GlobeOp will be putting together a pitch book, and looking for more deals outside of its traditional fund administration space. The mandate is not just applicable to hedge funds, but anyone who trades financial instruments. We should be able to sell this to insurance companies, to pension funds, to corporate treasuries. For us it isnt a product or servicing challenge, but a marketing success, concludes Hufschmid.
Hufschmid is a Global Custodian Legend. Click here for his full profile.