Global Custodian Hedge Fund Administration Survey 2010 Published

The 15th Global Custodian Hedge Fund Administration Survey is published today. It provides a snapshot of an industry which, unlike other parts of the securities services industry, has continued to fragment even as it has consolidated.

Responses were received this year on behalf of 81 administrators, 2 more than a year ago, when the hedge fund industry was still struggling with the immediate aftermath of the financial markets crisis. They range in size from the smallest, administering less than $500 million, to Citco, with assets under administration of $570 billion.

The chief cause of fragmentation is, ironically, consolidation. Larger administrators prefer larger clients, creating a niche for smaller administrators to service small to medium sized funds. This trend is reinforced by the increasing volume of institutional money invested in larger hedge funds. Institutional investors demand institutional quality administrators.

The principal reason for that is memories of the collapse of Lehman Brothers and the Bernard Madoff fraud. Institutional investors want to be sure the administrators to the funds they invest in are genuinely independent, and can offer independently fund accounting, greater transparency, more frequent and detailed reporting, and SAS-70 certified operational processes.

One CEO of a hedge fund administrator recently told Global Custodian that his firm experienced a 40% increase in due diligence queries from investors in 2009. Another says “managers are now required to provide potential investors with detail on their internal infrastructure and control environment as well as information on all of the external service providers they have selected.  As an administrator, we have been asked by our clients to provide much more detail to both current and prospective investors on topics ranging from our industry leading technology, our SAS-70 and the firm’s business continuity plan to our AML policies and procedures.”

But the core of the business remains fund accounting. The speed and accuracy of NAVs are the measure of quality mentioned most often by respondents to the 2010 survey, and those that performed well in this area almost always performed well overall. Reporting matters too. With hedge fund investors becoming ever more demanding in terms of information, the ability of hedge funds to keep their investors happy depends increasingly on their administrators.

Another important change from 2009 is the presentation of the survey results. A new category of rating, from Leading Clients, is introduced this year. It aims to measure the ability of an administrator to attract and satisfy the most sophisticated and knowledgeable types of client, and especially those familiar with more than one provider. Surveys editor Allison Cayse says that Leading Clients, which are familiar ion other Global Custodian surveys, “provide the sternest and truest test of the capabilities of a hedge fund administrator.”

Goldman Sachs claimed the top spot in the new category, closely followed by State Street AIS, the second largest administrator by AuA. BNY Mellon, which will from 2011 incorporate the client base of the separately rated PNC GIS, was third. The full league table of administrators servicing Leading Clients is as available here.

Two other new ratings categories were also introduced. They measure the performance of administrators as sole providers to clients (the Single Provider category) and as one of several providers to clients (the Multi-Provider category). In all, administrators were eligible for 13 ratings and 195 Best in Class awards, which are given to providers who perform particularly well in particular service areas on behalf of particular client groups.

In all, the survey attracted 1,420 responses (up 2%) and enough responses to rate 38 of the 81 providers (up by three). The table sets out in alphabetical order the ratings and Best in Class awards won by each hedge fund administrator that took part in the survey.

The full results of the 2010 Global Custodian Hedge Fund Administration Survey, including a full range of league tables by size of client, type of client and geographical origin of client, can be accessed by online subscribers here.

Full research reports are available from Muzaffar Karabaev, Director of Research at Global Custodian.

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