Service providers are becoming more of a strategic partner to their hedge fund clients as they look to provide a suite of services that go beyond a single solution proposition.
In the past, an administrator's primary function was to strike the fund's NAV and provide investor statements. Times, though, have changed.
"Service providers are viewed by managers much more broadly today and we are really aimed at becoming a partner with our clients. Not only are we able to help managers overcome the myriad of regulatory filings they may face, but we want to help them evolve which has required us to expand our suite of services," says Christine Waldron (pictured), global head of the Alternative Investment Solutions team at U.S. Bancorp Fund Services.
To meet this challenge and become a strategic partner with their clients, U.S. Bancorp Fund Services has focused on providing clean data for managers' systems to make them more efficient, offering middle office, regulatory reporting and investor servicing tools, along with tax reporting solutions that collectively help to create a more involved and inclusive relationship.
When asked what the primary drivers are behind this need to lean more on service providers, Waldron suggests:
"The primary factor is that fund managers are trying to streamline their operations to become leaner and more efficient. Another key factor is that the regulatory burden is increasing. There's been a fairly rapid evolution of the regulatory environment and as a result managers have sought to find the right partners to help support them and their products."
To highlight the pressure that managers are under, a recent Preqin survey published this summer found that 86 per cent of fund managers feel that regulation has increased the costs of business.
Another important driver of outsourcing is fee compression. Average fees this year have fallen to a 1.57 per cent management fee and 19.29 per cent performance fee. The more the management fee compresses, the less wiggle room emerging managers (in particular) have to commit capital to operations.
"That pressure is driving fund managers to be more operationally efficient compared to how hedge funds operated historically. What is the best utilisation of the manager's resources and what do they feel comfortable with outsourcing to a third party? Managers have to think about this more carefully.
"We do a lot to support our clients from a regulatory perspective. It is a continuously evolving space and it is probably the number one investment that we are making right now. We have a long history of supporting our clients' regulatory filings in the registered funds space and have a deep breadth of experience to draw upon," says Waldron.
Providing outsourced tax support is another area of focus. As tax evolves – FATCA, CRS – making sure that the fund's tax solution remains viable is important, confirms Waldron. "Our tax team works closely and consults with our clients to make sure they understand what they need to be doing and how we are able to support them," she says. "I would say the third area of focus centers around data services and middle office. When fund managers outsource more their need for more data increases substantially.
"Having robust data management and reconciliation capabilities around data points is absolutely critical. We reconcile thousands of data points to ensure that our clients get cleansed data back in to their environment," concludes Waldron
