By Mark Mannion, head of UBS Fund Services, Ireland
The last few years have been a booming period for the administration of alternative vehicles in Dublin. The hedge fund sector has grown faster than the overall fund administration industry, aided by the relatively flat performance over the past five years of traditional investment vehicles, encouraging the spread of alternative funds.
The result has been substantial growth in the scale of the administration business, in terms of both asset volume and number of employees. In June 2004, non-Irish registered hedge funds administered here represented assets totalling $259bn, up by 41 per cent over the previous 12 months and compared with just $45bn in 1998.
What's remarkable is that Ireland originally set out its stall as a centre for the administration of traditional UCITS funds, yet the assets of hedge funds domiciled abroad - mostly in the Cayman Islands - and administered here are now closing in very rapidly on the total for Irish-registered funds, mostly long-only, of $340bn. This makes clear that growth is significantly stronger on the alternative side, and that Dublin is well established as the premier administration centre for European hedge fund managers.
This growing maturity of the market is bringing changes to the structure of the industry. I think we all recognise that the day of the niche specialist provider is now over. The hedge fund industry is following a similar development pattern to the global custody industry, which was a fragmented market 10 years ago.
But as a result of consolidation and the knock-on effects of economies of scale, it became harder and harder for niche providers to survive, so today there are only four or five truly global custodians. The same thing is happening with hedge funds, where very few independents are left in the market and the big global institutions are again likely to end up dominant.
Although there will always be certain complexities involved in hedge fund administration, aspects of the work are similar across any type of fund operation, such as cash reconciliation and updating market prices, and are key opportunities for improving efficiency.
Meanwhile the barriers to entry have risen, because the leading players now use systems that are very expensive to acquire and maintain. Today the market leaders have purchased technology allowing the automation of tasks and procedures that previously would have been handled manually.
This is particularly important because of the risk of errors inherent in manual processing. Five years ago much of the industry was on spreadsheets because systems hadn't kept pace with developments such as performance fee calculation. This is no longer the case - you can invest in robust systems that enable you to eliminate risk in these areas.
At the same time, new practices are helping to minimise the biggest risk for hedge fund administrators, the valuation of securities. Most scandals arise when assets have been overvalued. However, the European administration industry is very sophisticated in terms of its approach to the independent valuation of securities, helped by a greater readiness on the part of investment banks to provide them.