Royal Bank of Canada's Jose Santamaria outlines the benefits of using an integrated approach to hedge fund services.
The market for hedge funds and fund of hedge funds servicing is being transformed by a number of developments, including rapid growth in the size of the alternative investment market, the emergence of institutional investors as a major source of new money, and a consolidation of the service provider industry stemming from the level of investment required to remain competitive.
At the same time, changes in the regulatory framework governing alternative investment funds have helped to bring the Channel Islands into the forefront of the industry, offering fund promoters and investment managers the advantages of high supervisory standards and an infrastructure of top-level service providers.
Custodians and administrators increasingly recognise that to remain participants in this fast-growing and dynamic industry, they must demonstrate a strong commitment to investing in both people and technology. The past year has seen a significant consolidation as service providers that prefer not to make the investment opt instead for joint ventures with strategic partners or exit the business altogether.
Meanwhile, alternative investments have accounted for much of the new money inflows into the funds sector. Industry participants estimate that the alternative investments sector will double in size from some USD 1 trillion of assets at present to USD 2 trillion by 2006.
The Channel Islands are already benefiting from this vigorous growth and industry experts believe they will increase their market share in the future. This is partly due to the expanded investor base for alternative investments.
While funds continue to cater for private investors, including high net worth individuals, family offices and trusts, much of the industry's growth is being driven by institutional investors, who are allocating as much as two per cent of their assets under management to alternative funds.
Guernsey has seen a significant increase in such corporate clients as pension funds, insurance companies and central banks. They insist on funds being domiciled in a jurisdiction that takes regulation, compliance and corporate governance very seriously, in addition to partnering with the highest quality service providers.
Technology is vital to servicing, but the fund management industry remains a relationship business. Leading custodians and administrators have always listened to clients to understand their needs, rather than trying to guess what they want or shoehorning them into a pre-existing service template. A dedicated relationship manager is vital to a one-person, one-face relationship on behalf of the administrator, custodian or bank.
But the need for a "one-stop shop" goes further. Fund sponsors and investment managers can benefit from the integration of all these services through a single interface. Avoiding the use of separate administrators, custodians and finance lenders assures clients that they will receive exactly the service and reporting they require, lowers costs, and reduces the risk of lost efficiency through fragmentation of services.
As one of the Channel Islands' leading providers, Royal Bank of Canada finds that clients are increasingly looking for a single, truly global multi-jurisdictional and integrated custody, administration, banking, relationship management and value-added service proposition.
In a fast-developing sector, promoters need a strategic, innovative and responsive partner to meet the changing needs of their demanding investor base.
By Jose Santamaria, Head of Institutional Sales and Relationship Management, Channel Islands, Royal Bank of Canada, Global Private Banking.