By Dermot Butler, Chairman, Custom House Administration
Dublin has a well-earned reputation as a financial services centre, and particularly as a centre for the administration of both traditional mutual funds and hedge funds.
The hedge fund market has grown by leaps and bounds over the past few years, leading to what many have described as the consolidation of the hedge fund administration industry in Dublin.
In fact, this has not actually taken place. What has happened is that many of the big, institutional administrators of traditional funds, which for the most part are institutions in their own right, have acquired smaller specialist hedge fund administrators. But acquisition is not consolidation.
One possible exception is the recent acquisition by BISYS of R & K Consulting, the former administration arm of the specialist US hedge fund audit firm, Rothstein Kass. This appears to have been a consolidation primarily of a large US practice - albeit combined with a smaller offshore practice - into the predominately offshore hedge fund practice of BISYS, which acquired Hemisphere several years ago.
On the face of it, the hedge fund administration business in Dublin appears to have changed, but only because we have said goodbye to Bank of Bermuda, Hemisphere, IMS, IMA, DPM and Tranaut. But all that has actually happened is that these companies have changed their names.
There is no doubt that all these companies that have been taken over by larger institutions, have had the opportunity to benefit from substantial economies of scale, with particularly regard to back-up staff in areas such as legal, internal audit, human resources and secretarial.
What is indisputable is that hedge funds administration requires a skill set distinct from the administration of vanilla long-only mutual funds. As a result, most of the new 'institutional' hedge fund administrators seem still to be operating much as they did before, albeit with some concession to their new parent's culture.
What has, in effect, happened is that the likes of HSBC, BISYS, BoNY, JP Morgan and State Street now have a specialist hedge fund administration division in addition to their traditional fund services businesses. There has not, in fact, been a shrinkage or consolidation of hedge fund administrators - they are merely wearing a different coat and have a different name.
Obviously there are enormous advantages for a hedge fund administrator in being associated with a big institution, in terms of creditability, capital, and the ability to service the institutional market. But does that mean that the smaller independent administrators, without the backing of an institution, should worry about their future? In a word, "no".
It is increasingly obvious that the new 'institutional' hedge fund administrators are targeting the institutional market, but this is likely to be at the expense of smaller managers and hedge funds. In some cases this means that start-ups with USD 50m to USD 100m will have to seek out smaller administrators, and some existing clients of newly 'institutional' administrators may also be seeking a new home, voluntarily or otherwise.
This is further proof, if it were needed, that change brings with it opportunity.