Bank of Bermuda has just been named the top hedge fund custodian/trustee and the number two hedge fund administrator in a survey by CogentHedge of the most frequently named service providers in its hedge funds database.
In this exclusive interview with Hedgeweek, Brian Wilkinson, the Country Head of Bank of Bermuda's Global Fund Services operation in Dublin, and Global Head of Bank of Bermuda's Global Fund Services Sales team, outlines the key trends and challenges faced by hedge fund administrators.
Prior to joining Bank of Bermuda, Wilkinson held the position of Managing Director of Fortis Fund Services (Ireland) Ltd (1995 - 2001), Executive Director of Fortis Fund Services (Isle of Man) Limited (1992 - 1995) and Executive Director of GAM Administration Ltd (1986 - 1992). He has over 20 years experience in senior management positions in the fund administration industry and has been a director on over 50 investment funds during this period.
HW: What trends do you see in terms of new hedge fund launches?
BW: 2003 is proving to be the year of the single manager, single strategy fund launch. Whereas 2002 saw a significant focus on Fund of Funds, 2003 has been much quieter on this front. In addition, fund sizes at launch are coming down, with USD 20 million launches being considered successful. In the first half of 2003, 110 new funds were launched in Europe1, with over USD 8 billion in assets entering these funds at the close of the initial offering period. The range of strategies being covered by new funds is also broadening noticeably, with the launch of credit funds and macro funds playing a significant part in the sector.
HW: What are these hedge funds looking for from their administrators?
BW: Hedge fund managers are increasingly looking to their administrators to provide additional value added services, above and beyond the traditional core services of calculating the NAV and processing subscriptions and redemptions. These additional services include middle office services, performance attribution and the provision of risk tools. It may only be a matter of time before administrators are also involved in providing capital introductions using their network of Fund of Funds contacts.
HW: How are you responding to these demands?
BW: Global Fund Services ("GFS"), the fund administration arm of Bank of Bermuda, is responding aggressively to the new demands by introducing an alliance programme focused on partnering with some of the leading technology vendors in respective fields. Our partnership with these leading vendors is allowing us to provide flexible and proactive technology solutions, which are scaleable as our clients' businesses evolve. For example, GFS recently launched GFSTrade in partnership with Beauchamp Financial Technology. GFSTrade provides front office capability encompassing a standardised trade entry and trade order management platform, real time trade enquiry, real time pricing and portfolio P & L and a host of other features. The alliance programme, which has been in place for about a year, will be expanded over the next six months to provide additional features, which will put GFS at the forefront of technological solutions specific to our alternative investment client base.
HW: In which markets in Europe are you likely to see growth over the next 12 months and what are the reasons in each case?
BW: London has always been the centre of growth in the European hedge fund industry. However, we are seeing expansion in Germany, Italy and the Scandinavian region too. Some of this growth is down to new fund legislation in the specific country as is the case in Germany, or an increasing awareness in the local market at the expanding opportunities in the alternative investment sector. We also expect the French market to grow, and anticipate that within time it may become the leading European centre for alternative investments outside London.
HW: What trends are you seeing in terms of fees?
BW: Due to the increasing competitive landscape, fees are being driven down significantly. Average administration fees for a typical Long/Short European Equity Fund were pegged at 15 basis points a year ago. The same fund today would only attract a starting administration fee of 12.5 basis points. In addition to declining fees, fund managers are demanding the production of NAVs on a more timely basis - whether it be within 24 hours of month end, or more frequently, providing for daily liquidity. GFS, through its alliance programme, is focused on technology enhancements to meet this demand by partnering with one of the leading fund accounting vendors, Advent, and a leading investor services vendor Koger/NTAS. Our aim is to achieve significant straight through processing by capturing trades via GFSTrade, reconciling those trades with Prime Brokers via an automated trade reconciliation platform, which is powered by Smartstream, and delivering the fund's NAV via the web, through GFSOnline and other investor services.
HW: How is your operation placed for growth?
BW: The GFS Dublin office has seen over 70% growth in assets under administration over the past twelve months, and this growth is expected to continue. With over 140 dedicated employees, the office has the physical capacity, together with the technology, to acquire significant new business. We have a very aggressive recruitment and training programme in place to ensure that the expected growth is managed proactively. GFS's strategy of market growth via geographical expansion is evidenced in the recent launch of a branch office in Japan to service the requirements of Tokyo-based clients and our office in South Africa, which provides a gateway to us and our clients wishing to target new markets. GFS continues to expand both its geographical presence and servicing capabilities to better meet the demands of our clients.
HW: What do you see as the biggest challenge/s for hedge fund administrators in Europe over the next 2-3 years?
BW: The biggest challenge really revolves around the expected growth in the industry, coupled with declining fees, and fund managers' increasing demands and expectations. These three aspects are clearly not aligned and this is where the challenge lies. At the end of the day, administrators are in business to make money, and this can only be achieved through technological improvements, better training of staff and providing additional services to enhance revenue streams.
As the alternative investment industry moves increasingly into the fund management mainstream, the provision of daily liquidity for hedge funds coupled with retail products will test both the technology and knowledge base of all administrators. With daily performance fee calculations coming into play, and the delivery of NAV's with shortening time frames becoming the norm, the challenge for administrators will be to maintain their margins, by increased efficiency, and to deliver a service to a less sophisticated investor base in a reasonable time frame.
Copyright Hedgeweek 2003