Strategy convergence poses servicing challenges
The European asset management sector is currently experiencing a convergence between traditional and alternative asset management styles. Investors are becoming more literate on how to invest and what investments could generate higher returns, more quickly and in a safe regulated environment. This trend poses challenges for fund administrators and custodians, especially if they seek to accommodate different types of investment strategy on the same platform.
How hard it is for a long-only fund manager to differentiate himself from his peers! These funds perform similarly and hardly beat the index. How can investors' hunger for returns be satisfied if the expertise of long-only houses is limited to long-only products?
Traditional asset managers, including some of the biggest European institutions, have been steadily acquiring hedge fund boutiques, but until recently, they have kept the two separate. This is now changing as traditional managers use Ucits III pan-European retail funds to employ techniques hitherto confined to alternative managers and vehicles such as Luxembourg Part II funds and Specialised Investment Funds.
Regulators, the CSSF in Luxembourg to the fore, understand these changing needs and are offering traditional asset managers new flexibility as long as investors remain protected. One technique available to Ucits III funds, going short using derivatives, has prompted many big investment houses to offer 130/30 funds and similar strategies.
Meanwhile, alternative asset managers are reaching a wider audience among institutional and sophisticated investors by using regulated fund vehicles and eschewing the offshore domiciles of the Caribbean and the British Isles for EU member states such as Luxembourg.
Investors can access regulated investment schemes that use complex alternative strategies in a protective environment. The launch of the SIF regime enables hedge fund managers to obtain a regulatory quality stamp from the CSSF without the obstacles that limited the growth of the sector in the past, such as the need for promoter approval.
Funds today, whether from traditional managers going alternative or hedge fund managers seeking a mainstream clientele, bring together assets ranging from blue-chip equities to extremely exotic derivatives. Administrators must offer a platform that can straddle these extremes and deliver NAV production whatever the fund's asset mix.
One should not disregard the growing public interest in other alternatives such as private equity and real estate, areas in which Fortis is one of the leading service providers in Luxembourg. Since the SIF legislation allows umbrella funds containing a mixture of alternative strategies, service providers must be capable of accommodating direct or indirect real estate investments alongside traditional assets and derivatives in the same structure.
How can administrators support the needs of alternative funds or hybrid structures including alternative strategies? Part of it can be achieved by a global IT infrastructure enabling a 24/7 servicing model. This requires additional pricing capability to encompass automatic feeds for both straightforward and highly complicated assets from diverse sources.
This is why, a few years ago, Fortis commissioned an efficient data management system that could, in addition to other functionalities, obtain pricing for even the most exotic securities, and could be upgraded to handle future market developments. Delivering other value-added services such as securities lending and the provision of bridge and leverage finance can generate more revenues for the service provider, as well as for asset managers and the vehicles they are managing.
Luc Leleux is director of business development with Fortis Prime Fund Solutions Luxembourg
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