The hedge fund administration (HFA) market is facing radical structural change. After a wave of bank-orientated administrators, the market is fracturing. Between 2006 and 2014, there have been over 30 HFA acquisitions. Earlier this year, BNP Paribas Securities Services completed the acquisition of Credit Suisse’s hedge fund administration business. As the industry sees increased consolidation, administrators have to evolve their business models to keep up with change in the industry. BNP Paribas’ Ian Lynch, global head of Hedge Fund Services, and Philippe Ricard, head of Asset and Fund Services, speak to Global Custodian on where the industry is heading and how it plans to meet these changes.
GC: How significant is consolidation in the HFA space to service offerings?
IL – Fund administration is still far too fragmented an industry. If you draw a comparison to prime brokerage, there about 10 relevant players and six large ones; whereas in the admin space there are around 70 providers. That list is consolidating down at an accelerating rate, which has pushed fund managers toward providers that have more robust balance sheets. Soon AIFMD will come fully into play as we move away from depot-lite towards full depository, and consolidation will become more obvious in the fund admin industry over the next couple of years as a result.
On the other side, we are seeing the breadth of services that clients need from us now is very different to what it was in the past. Previously it was just ‘give me my fund administration, give me my NAV’ but not blended with custody, collateral services, certain types of finance services etc., as it is now. There is certainly a need for providers that have a broader set of services, and that is becoming more obvious as both traditional funds and hedge funds expand their investor bases.
GC: Where will global providers stand alongside boutique administrators?
PR – We see the likelihood of polarization between specialist providers and generalists/global custodians. We want to find the right balance whereby we as an institution can provide a ‘best of breed’ service combining the right elements of both. We have designed an integrated model and leadership team to deliver on our promise to be agile and global.
IL – We want to operate like a boutique but with the institutional resources of a globally operated bank.
GC: Is BNP Paribas looking to integrate administration with other services for funds?
IL – From a financing perspective I do think there are some very interesting angles. An enhanced custody model is something we have been looking at internally, there is an opportunity for an alternative type-of financing that isn’t prime brokerage led. This is something we are looking at where we can help clients diversify their financing requirements by working alongside their traditional financing providers.
PR – On the back of collateral management, cross-margining, as well as securities financing, the services custodians offer to their clients naturally include hedge fund strategies. I think our offering is developing steadily alongside, and not in competition with, traditional prime brokerage models. We are developing contacts and teamwork with our PB desk to find the best way to service clients, whether they want to use the traditional PB route, a custody solution, or a combination of the two. We want our clients to have the different options available for them to choose the best set up according to their detailed operational requirements.
GC: How important will data management in providing fund administration services?
IL – We see ourselves as a custodian of data – as the admin provider we sit in the middle of all a hedge fund’s data, from investor to accounting data. So I think the bigger question has been how do we use that data to create real good quality content for our clients? When you start comparing different sets of data against each other you get good content that feeds into decision making. We are launching DNA Hedge Fund Explorer, an analytics tool which makes data smarter and easier to access. Both managers and investors are on a quest for better data and they want more of it and more often. The world we are moving into sees us equipping our clients with the tools to really make the most of the data sets we provide them, that’s the aim of DNA Hedge Fund Explorer.
PR – We take a very client-centric approach. We want to be in the mind-set of the COO or fund manager or ops manager when they access their data, so that every user of this tool can navigate it for their own needs.
GC Perspective: BNP Paribas Securities Services on the Evolution of Fund Administration
The hedge fund administration (HFA) market is facing radical structural change. After a wave of bank-orientated administrators, the market is fracturing. Between 2006 and 2014, there have been over 30 HFA acquisitions. Earlier this year, BNP Paribas Securities Services completed the acquisition of Credit Suisse’s hedge fund administration business. As the industry sees increased consolidation, administrators have to evolve their business models to keep up with change in the industry.