Interview with Andrew Gordon – “It really took off in Asia last year,” comments Andrew Gordon, head of BNY Mellon’s Alternative and Broker Dealer Services, Asia Pacific, when discussing the firm’s prime custody model. Launched in 2009, it has grown into one of the fastest growing businesses within Alternative Investment Services (AIS) with approximately USD157billion in AuC.
BNY Mellon has moved quickly to service the entire liability side of hedge funds and with counterparty risk at the top of everyone’s agenda it’s little surprise that prime custody has become popular.
“The prime custody business was first conceived ahead of the financial crisis. In early 2008 a client of ours – one of the largest hedge funds in Asia – was telling me how he was buying credit default swaps (CDS) on his prime brokers so even back then people were thinking about counterparty risk. Segregating assets in a prime custody account reduces exposure to the prime broker,” explains Gordon.
Hong Kong is the region’s biggest market for BNY Mellon’s prime custody offering with growth primarily being driven by medium and large hedge funds with a more institutional focus. “Year-on-year we have doubled the number of accounts and AuC for our Hong Kong-based clients. Having said that it’s still not a mature business; the habit of using a prime custodian is still new, not just in Hong Kong but globally.
“Nevertheless, we intend to put investment behind this growth to make sure we have the wherewithal to cope with demand; at present we have close to 50 people in the region serving the fund administration, settlement, safekeeping and collateral side of the business,” states Gordon.
“There are a number of different ways the accounts are used,” explains Gordon. “For some the account is used purely for moving excess cash, for others it’s for moving unencumbered securities that didn’t need to be left as collateral with their prime brokers.”
The fact that the majority of growth in prime custody is coming from locally headquartered hedge funds is, in Gordon’s view, part of the ongoing “institutionalisation of the Asian hedge fund industry”. This is further evidenced by the growing number of high quality COOs joining Asian hedge funds.
Prime custody offers what Gordon calls the “Four S’s”: settlement of securities transactions; safekeeping of assets; segregation, which is really the key feature, and speed. “The way hedge funds expect to be serviced is different to that of other institutional investors and that’s one of the reasons why we have created a dedicated prime custody service team in Singapore,” explains Gordon.
“Properly constructed, a prime custody relationship can add value to the overall business of a hedge fund and certainly assist in the relationship with the prime broker, not undermine it,” asserts Gordon.
This move towards bigger funds in Hong Kong opening prime custody accounts, is, in Gordon’s view, part of the ‘new norm’. But as Gordon points out, the overall level of support goes beyond the “Four S’s” of prime custody.
“We also have collateral products, fund administration, valuation and asset verification products, as well as prime custody. If you strip away the detail, a lot of it is focused on helping the manager demonstrate good governance around the operational side of fund management – and meet the needs of its investors. That’s a deliberate strategy of ours.”
Material contained within this article is intended for information purposes only. It is not intended to provide professional counsel or investment advice on any matter, and is not to be used as such. No statement or expression is an offer or solicitation to buy or sell any products or services mentioned. The views expressed within this presentation are those of the contributor only and not those of The Bank of New York Mellon or any of its subsidiaries or affiliates, and no representation is made as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this presentation. This does not constitute BNY Mellon Alternative Investment Services advice, or any other business or legal advice, and it should not be relied upon as such. All data as at 31st March 2012
Andrew Gordon is head of BNY Mellon's alternative and broker dealer services Asia Pacific