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The HW Interview: Unlocking added value in a USD 155 billion global hedge fund admin business: Paul Smith, Head of Alternative Fund Services, HSBC

It is one year today since HSBC acquired The Bank of Bermuda Limited and with it the hedge fund services business. Paul Smith takes the wraps off the business.

HW: What were the fundamental components of the restructuring/merger process between the Bank of Bermuda fund administration business and HSBC's fund administration business?

PS: We took the old Bank of Bermuda global fund services business and effectively cut it in two. One half was Bank of Bermuda's traditional business, which was absorbed into the existing HSBC Institutional Fund Services business, co-headed in Europe by Mike Martin and Stewart Crawford and in Asia Pacific by Alastair Murray.

I kept the Alternative Fund Services business - which covers, private equity, single strategy hedge funds, funds of hedge funds, multi manager funds, property funds, absolute return and emerging market funds.  We also brought into this business unit all alternative fund administration business, which HSBC serviced.

Both Institutional and Alternative Fund Services form part of HSBC Securities Services headed by John Gubert in London.

HW: What is the management structure of the alternative fund administration business within HSBC?

PS: I run a global management committee, which consists of myself plus a regional head for the Americas, Rob Schultz, a regional head for Europe, Chris Wilcockson, and a regional head for Asia, Lilian Wong. I also have a head of sales, Brian Wilkinson, and a head of product development, Drew Douglas, a head of CRM, Alan Smith, and a chief administration officer, Nigel Fielding.

Each location has a country head and mirrors the global committee structure internally.

HW: What is the size and geographic reach of the alternative business?

PS: As of 31 December 2004 we had USD 155 billion in funds under administration, of which approximately USD 10 billion is in private equity, USD 90 billion is in single strategy hedge funds and the balance - USD 55 billion - is in funds of hedge funds.

The overall figure of USD 155 billion is sourced 40% Americas, 40% Europe and 20% Asia. Our team strength of around 1,000 is globally split along similar lines, servicing 1,000 clients and around 2,000 funds.

HW: What are the strengths of the alternative fund administration business and how will hedge fund clients benefit from the restructure?

PS: The strengths are three-fold: First, the global reach of the new business under HSBC, which we always had, but is now underpinned by the world's second largest financial institution. This gives us the ability to reach clients in parts of the globe to which we previously had no access, and also gives us the ability to expand quite aggressively in Europe and in Asia Pacific.

Size of balance sheet is the second strength. We are looking at selective opportunities with some of our larger hedge fund clients where we can offer them added-value services such as foreign exchange, securities lending, CFDs (contracts for difference) and derivatives clearing. In all these areas, we want to be added to our larger clients' list of counterparties.

These added-value services will be offered by the Corporate, Investment Banking and Markets (CIBM) division of HSBC headed by Stuart Gulliver and John Studzinski in London, with Grant Thompson in New York as the sector head for hedge funds, focusing on capital markets products for key high value clients.

The third strength is our ability to now service all types of clients. If you are an institutional asset manager looking to expand you can have your alternative and non-alternative funds serviced by the same institution.

HW: As Head of Alternative Fund Services for HSBC what is your strategic focus for the business?

PS: We have a very broad spread of clients in terms of their geographic location, strategies and sizes. My mission is to help HSBC engineer a broader product spread that can be cross-sold and delivered to this large and diverse client base.

In geographic terms, we are very interested in expanding in Europe, particularly in three countries - Italy, Germany and France. We are also looking at expanding into Australia. These expansion opportunities are being driven by the rapid growth of onshore business in these countries.

In addition to the above, we are looking at onshore business in Japan, where we are seeing the beginnings of a domestic hedge funds market.

On the client segmentation side, we will shift our focus towards the mid to upper end of the market, in terms of developing the capital markets opportunities I referred to earlier.

This means that we will be more selective in terms of the start-up managers we choose to work with.

HW: How are you executing your cross-selling strategy?

PS: It is an ongoing process as there are a number of issues such as capacity constraints and client priorities that we need to address as we develop these new products.

We have built a new client relationship role handled by Alan Smith at the global management team level to start unearthing opportunities and to help package these products.

HW: What do you expect to see in the private equity market?

PS: We believe that the private equity cycle globally has turned quite sharply in the last 12 months, having been out of favour for some time. Fund raising in this sector is likely to continue rising in 2005 and we are installing a new private equity system to deal with this growth.

This also means that we are taking on new people to deal with these opportunities, specifically in the US where we are actively hiring. We are also seeing pockets of private equity activity in Guernsey and Bermuda, along with a fair amount of activity in Asia Pacific.

Increasingly, there is a blurring between private equity funds and hedge funds. We are not just seeing hedge funds moving into private equity, we are also seeing hedge funds looking more like private equity structures, with lock-ups and different percentages of carried interest in various strategies.

HW: Where do you expect to see the biggest growth in 2005, in terms of assets under administration?

PS: We believe it will come from the institutional market. We feel that the independent boutiques will probably get a smaller slice of assets in 2005 compared with institutional asset managers who are better placed to pick up the growing flood of pension fund assets into the alternative space.

HW: Where do you expect to encounter challenges in executing your strategy for the business and how do you propose to overcome these?

PS: The biggest challenge is to keep up with the ever-increasing complexity of strategies. As managers fight to distinguish themselves by devising new strategies, we have to keep current in terms of educational aspects, pricing aspects and technology aspects of servicing these strategies.

In 2004, with the growth of fixed income arbitrage, bank debt and credit spread trading, we had to ensure that we could service and make money from these complex strategies. We are known as a specialist administrator and our challenge is to keep our lead in this premium space.

There will soon be a shake-out in the hedge fund administration market, as administrators who took on complex strategies in 2003-2004 without being able to really service them, return to focusing on 'plain vanilla' long short equity funds, where they will need large volumes of business to survive.

HW: What were the high points of 2004  - and what were the lows?

PS: The lows were the amount of work involved in the integration process.  With an organisation as big as HSBC, size brings its own challenges.  Having said that, dedicated teams from both HSBC and Bank of Bermuda have to be commended on their incredibly hard work in bringing the two businesses together in the time frame that they did.

The high point would be the flow of new business as a direct result of the acquisition of Bank of Bermuda by HSBC. The power of the HSBC brand has been phenomena it's a real door-opener and a bonus for all our clients who can leverage off the brand.

HW:  Where would you expect the business to be by the end of 2005?

PS: By the end of the year I would like to achieve much greater 'share of wallet' by cross-selling other HSBC products to our clients; to have concentrated the business much more on delivering services to the complex end of the market; to have spread our wings geographically into at least two more locations, probably Milan and Australia; and to be at least 40% larger than we are today, taking us over the USD 200 billion level in terms of assets under administration.

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