The Hedgeweek Interview: Looking at growth beyond the USD 100 billion level: Sean Flynn, Managing Director and Head of UBS Hedge Fund Services.
Sean Flynn outlines developments at UBS Fund Services, including the opening of a Toronto fund administration operation in 2006 to service the North American market.
HW: How has UBS Fund Services performed over the last year?
SF: At the end of 2004 UBS Hedge Fund Services had approximately USD 80 billion of assets under administration, and by the end of September 2005 we had USD 100 billion in assets under administration. That's nearly 25 per cent growth for the year-to-date, and we still have a nice pipeline of business ensuring that growth will continue to the end of 2005 and well into 2006.
Most of that business is in the Cayman Islands. Our office in Dublin, which opened a year ago, already has USD 5 billion under administration, and is focused on servicing the European hedge fund managers.
HW: What is the split of business between funds of hedge funds and single managers?
SF: Our split of business is about 50-50 between funds of hedge funds and single managers, in terms of assets under administration.
We provide services to around 700 funds, split almost equally between funds of hedge funds and single manager funds.
HW: What trends are you seeing in the administration of the hedge funds market?
SF: What we have seen over the last year, particularly on the single manager side, is the increasing complexity of the products that these managers are investing in.
We are seeing many different strategies placing new challenges on administrators to value complex instruments, including structured notes, credit-linked notes, bank debt and various types of illiquid securities. Processing these complex instruments requires additional highly skilled resources. We are also seeing more managers turn towards hybrid products using private equity.
HW: What is driving the trend towards hybrid products?
SF: The search for alpha is driving this trend. Returns have been low among some of the traditional hedge fund strategies and some single managers are seeking to add returns from areas such as private equity, putting 5-10 per cent of their portfolios into this sector.
HW: How are you catering for this trend towards private equity?
SF: We have already had dedicated systems in place for dealing with private equity for some time. We have a system called Investran, which deals with private equity, and we have teams that focus on this space too.
HW: What was the impact of last year's hurricane on Cayman and how did UBS deal with it?
SF: At UBS, we already had a business continuity plan in place for the eventuality of a hurricane or natural disaster. We activated that plan when we got word of the hurricane, and evacuated our team to another location.
However, when we saw the full extent of the damage brought by the hurricane, we realised it would be many weeks before Cayman recovered all its facilities and infrastructure. Although our own building was not touched by the hurricane, we relocated about 60 of our staff to a back-up location and we were up and running within a week, using the significant resources we had at our disposal as part of a global bank.
This quick recovery also had a beneficial impact on growth in 2005, with many existing clients increasing the volume of work placed with us, and many new clients coming in as a direct result of a boost in their confidence in us.
HW: How are you preparing for the eventuality of another catastrophic storm?
SF: We are developing a fund administration office in Toronto, scheduled to open in February 2006. This office is being set up with all the systems in place to run a fully operational fund administration business servicing our North American hedge fund clients. As it will also act as our business continuity location, it should also give a further boost in confidence to our clients worldwide.
HW: Where are the asset flows coming from and how are you servicing these flows?
SF: Although the asset flows have not been as strong as in previous years, the US is still the dominant hedge fund market, accounting for around 50 per cent of asset flows, with Europe accounting for up to 40 per cent and Asia/RoW for around 10 per cent.
We service the US market out of Cayman and, from next year, Toronto, with marketing teams in New York. For Europe, the administration centre is Dublin with marketing teams in London.
Lastly, we have the Asian market, which is small but growing on two fronts: First, most of the Asian asset flows are those that are from Japanese institutional investors to European or US managers using offshore - principally Cayman - products. We already have a significant share of this market.
Second, there is a growing market of local hedge fund managers setting up in Hong Kong and Singapore. We have not at this point in time entered the market to service this sector, however we intend to look at this area in 2006 and examine what type of servicing requirements need to be put in place for this market of emerging Asian managers.
HW: Are you going to open an Asian office in 2006?
SF: We are looking at the potential of opening an office to service the Asian market from 2006 onwards.
HW: What has been happening in the European market?
SF: We started our fund administration business in Dublin last year and have had a very good year so far in 2005. We have built up the team to 24 people and we have strong growth plans for 2006.
There is still strong potential for growth in Europe and we want to add a new edge to the market, bringing a high quality of service to differentiate ourselves from some of the more established players.
HW: What is your spend on technology and what enhancements are you currently rolling out?
SF: Our technology spend is in the region of several million dollars a year. We have already introduced web-based reporting, which is currently being rolled out to clients around the world, and we have also built interfaces with all the key prime brokers using Advent Geneva.
HW: Do you include a risk management offering?
SF: We are focused on building a high quality fund administration service and do not currently offer a risk management service, although I would not rule it out for the future, if we see a big demand for it from our clients.
HW: What are your targets for growth in 2006?
SF: The hedge fund business will continue to grow, and some of that growth will be fuelled by the additional money coming in from the institutions/pension funds, but the growth will not be of the same high rate as in previous years, so I would target growth in the range of 10-20 per cent.
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