Worldwide the hedge fund industry is feeling the effects of the credit crunch, the demise of stalwart Wall Street prime brokers, falling equity markets, a flight to quality and a return by investor
Worldwide the hedge fund industry is feeling the effects of the credit crunch, the demise of stalwart Wall Street prime brokers, falling equity markets, a flight to quality and a return by investors to conservatism. But for RBC in Guernsey, while the growth of custody business for traditional managed accounts has slowed over the past year, demand for its services from funds of hedge funds (FoHFs) is as strong as ever.
This may be down in part to that very conservatism among investors seeking risk-adjusted returns. While FoHFs have also struggled to maintain performance levels, in the current climate investors seem less confident about investing in single-manager funds and some multistrategy funds have also experienced considerable difficulties over the past 12 months.
Although the listed FoHF sector declined dramatically as discount provisions were eroded by funds’ liquidity during panic selling, it is important to remember that the sector has benefited from changes to UK capital gains tax rules in 2008, with a surge in secondary offerings on the London Stock Exchange.
According to RBS, a total of GBP1.51bn was raised for London-listed hedge funds and FoHFs in the first seven months of this year, around half for follow-on issues, compared with GBP1.38bn in the same period of 2007. However, consolidation or wind-down look inevitable.
The business has also been helped by two notable trends in Guernsey: the entry into the fund services market of trust companies, and the increasing diversity of alternative funds. Trust companies servicing funds investing in areas such as films, music rights and agricultural land are approaching RBC to act as custodian, a role required under Guernsey’s fund rules. The island also is domicile to two wine funds, and at least one legal claims fund.
RBC benefits from its long pedigree as a service provider in Guernsey, with around 15 years as an administrator and more than 20 in custody. Our reputation among FoHFs ensures a steady flow of new business and means there is no temptation to ‘style drift’ and take on other types of product outside staff’s core competences.
The group is increasingly benefiting from its global network and broad range of services. For example, the Guernsey fund administration unit can put managers looking for leverage in contact with the RBC capital markets business.
Guernsey remains extremely competitive for fund services because of its experience and skills, geographical proximity to the UK and Europe, and the reassurance to investors of its highly-regarded regulatory structure and high standards of corporate governance. This is evidenced by enquiries from Asian promoters reaching out to Guernsey at the request of European institutional investor clients.
An important safeguard for various categories of fund is the role of the custodian trustee, which monitors the activities of the administrator and promoter, exercising fiduciary oversight over the servicing process and the valuation of funds, and ensuring that the manager is adhering to the fund’s investment parameters.
The RBC custodian trustee department oversees funds serviced both in-house and by third parties. It is basically good discipline to have someone overseeing the servicing process with a dispassionate eye, and it helps the fund’s board of directors to hold the administrator to account.
Stuart Mauger is a senior manager with Royal Bank of Canada (Channel Islands) Limited in Guernsey and head of business development for RBC Wealth Management’s corporate and institutional business in the British Isles
