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GlobeOp sees surge in redemptions and negative performance curbing asset growth

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GlobeOp Financial Services, a provider of business process outsourcing, financial technology services and analytics to the hedge fund industry and

GlobeOp Financial Services, a provider of business process outsourcing, financial technology services and analytics to the hedge fund industry and other sectors of the financial services industry, says its business has remained strong during the third quarter despite the continuing turbulence in the markets and the wretched month suffered by hedge funds in September.

GlobeOp says assets under administration grew from USD104bn at the end of June to USD108bn, boosted by more than USD5bn in assets generated by new fund launches. The quarter also saw a USD5.5m investment in a new data centre and office facility in Yorktown Heights, New York.

However, GlobeOp says October 1 redemptions exceeded subscriptions by around USD2.5bn, and acknowledges that the possibility of higher than normal redemptions, lower than normal subscriptions and negative fund performance in the coming months is greater as a result of the extreme conditions in global financial markets. “In the near term, we believe smaller and less successful hedge funds will be at risk of closure and even proven managers will find asset gathering – and in some cases remaining in business – a challenge,” the firm says.

“We have continued to grow revenues and assets against a background of turbulent markets and a challenging environment for our clients,” says chief executive Hans Hufschmid. “The three-month period to September has been the strongest quarter this year for fund launches from new clients as well as launches from existing clients. In addition, client funds grew organically during the period.

“As a leading provider of middle-, back-office and administration services to over 180 clients representing hundreds of hedge funds with total assets of USD108bn, GlobeOp is uniquely placed to identify trends and potential future hedge fund industry service requirements. While it is too early to determine the full impact of recent events on the hedge fund market, we have already seen clear short-term effects on our clients and identified emerging shifts in industry fundamentals.”

Hufschmid says that while the leverage of GlobeOp’s clients remains unchanged at around 8:1, they have significantly reduced their notional OTC derivative exposure from USD11.4trn at year-end to USD6.6trn at the end of September. In addition, they appear to have outperformed the hedge fund industry as a whole with an average decline of around 3 per cent in September and some 5.5 per cent over the first nine months of the year.

“Our view of the new market fundamentals leads us to believe the events of the past few months will generate good opportunities for GlobeOp,” he says. “Many hedge funds are below their high water marks and are struggling to maintain their in-house operations and technology. Outsourcing their middle and back office can lower their cost base and enable them to scale their expenses as their net asset values decrease or increase.

“Recent events have made it clear no one is immune from credit deterioration. Hedge funds are no longer able to take the credit of counterparties for granted, and that has led to a change in behaviour. We should see a continuing trend of using multiple, rather than single, prime brokers reflecting prudent business practices for hedge funds.

“Our platform facilitates this shift as it gives clients access to a multitude of prime brokers and facilitates seamless movements from one to another. This proved key for many clients during recent turbulent times such as the build-up to and aftermath of the Lehman Brothers bankruptcy. In addition, hedge funds will seek to diversify risk and exposure by working with independent administrators separate from their prime broker, bank or other hedge funds. “

Hufschmid believes that the practice of OTC give-ups to a single counterparty should also become much less prevalent as hedge funds diversify their risk over multiple banks. “To operate successfully under this new model, a hedge fund will require a solid OTC infrastructure that includes pricing, payments, reconciliations and collateral management,” he says.

“We believe the continuing turmoil in global markets will hamper the financial sector in the short term, but we also expect the new market fundamentals to yield mid- and long-term opportunities for top-tier hedge funds and administrators alike. Investors and fund managers will place a sharper focus on risk analysis, collateral management, multiple prime broker and counterparty arrangements, as well as operational cost controls.

“Historically, periods of market dislocation have produced value-creation opportunities for investors and hedge funds. Now, with diminished competition from investment banks seeking alpha or leverage for their proprietary trading activities, nimble hedge funds will move swiftly to access those opportunities.”

Established in 2000, GlobeOp serves more than 180 clients. A company registered in Luxembourg, GlobeOp employs more than 1,800 people at its headquarters in London and New York and offices in Dublin, George Town (Cayman Islands), Harrison (New York), Hartford, Connecticut, and Mumbai.

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