Andrew Collins outlines the global development of Fortis Prime Fund Solutions and also highlights some plans for 2006.
HW: What is the size and scale of Fortis Prime Fund Solutions?
AC: Operating from 13 offices around the world, we have over USD 200 billion in assets under administration, split roughly 55-45 in favour of fund of funds. In the context of funds of funds in particular, we have also developed a significant banking, custody and financing business.
HW: Where are your key administration centres?
AC: We have three main fund administration centres: Europe (Dublin and the Isle of Man), Western Hemisphere (Cayman and Curacao) and Asia (Hong Kong). Dublin is our head office, where we have over 200 staff (of the 600 staff globally) and where we are one of the larger administrators.
The data input is conducted on a global, 24-hour system, moving seamlessly between the three 'hubs' and the three time zones. Between these three locations, we offer all services for the alternative investment industry, from custody to finance, from banking to administration.
HW: Who is setting up new funds and what structures are they using?
AC: A lot of hedge funds are being launched in Asia ex-Japan, in Europe (particularly the UK) and in the US. These are typically being run by people such as former proprietary traders. We are also seeing an increase in hedge fund launches in newer regions such as Australia.
In terms of structures, the trend has not changed much over the past few years. It would appear that the most popular jurisdiction is still Cayman - either stand-alone or master feeder Cayman structures, depending on how many categories of investors the manager is targeting. Typically, managers are setting up unit trusts for Japanese investors, corporate vehicles for European investors & US tax exempt investors and partnerships (or 'check-the-box' corporate vehicles) for US taxable investors.
HW: What differentiates you from your competitors?
AC: As part of a major bank, we can offer leverage and bridge finance to fund of funds. We can offer our clients access to the bank and a whole range of financing products, not just leveraged products or bridging finance, through one channel.
On the funds of hedge funds side, we are part of a small group of 6-8 banks that offer leveraging facilities. Unlike our competitors, we offer this mostly in the form of a cash loan rather than doing it through a synthetic structure such as a total return swap or an option. This tends to be cheaper and can offer the client a greater degree of flexibility than a leveraged synthetic structure.
Our fund of funds clients can limit the number of services providers with which they must liaise to one - Fortis. This enables them to focus their attention on the business of selecting good managers.
Finally, our client focus has given us a great competitive advantage over our competitors - be they administrators or leverage providers. Every Fortis client is given one global relationship manager who is in touch with the client on a regular basis to ensure that the client is being serviced satisfactorily and that any issues that arise are being dealt expeditiously.
HW: What about banking services to single hedge funds?
AC: For single manager hedge funds, typically the prime broker will provide a hedge fund with all of its banking facilities. This arrangement is facilitated by virtue of the assets of the hedge fund being pledged to the prime broker (which also acts as custodian). Accordingly, the only way we can service this market is in the capacity of prime broker - we currently only act as prime broker for a small number of hedge funds.
HW: Is Prime fund Solutions planning to penetrate any new markets or regions in 2006?
AC: We are constantly looking at opportunities to expand our presence and exploit new markets and regions. In 2006, I anticipate that we will set up several offices - possibly one in Australia and a couple in the Western Hemisphere, perhaps Toronto and San Francisco.
In addition, we will be keeping a close eye on the Middle East, in particular Dubai. Until recently, alternatives have not been at the forefront of Middle Eastern investors' minds as local markets have been providing high double digit and even triple digit returns. These returns together with the complexity of Shariah law and the geopolitical landscape are thought to have kept industry incumbents away. However, a marriage between Middle Eastern investors and Hedge Fund managers seems imminent given the increased sophistication of the local financial infrastructure and looming local stock market corrections.
HW: From which products and services do you anticipate Prime Fund Services deriving most growth in 2006 ?
AC: Having invested heavily in IT infrastructure over the last few years, we believe that our product offering to single manager hedge funds is now comparable with that of the other pre-eminent fund administrators. We will endeavour to boost our hedge fund administration client base significantly during 2006.
In recent years, we have enjoyed the enviable position of being the largest administrator to funds of hedge funds. Our offering has been enhanced enormously by our ability to provide bridge/leverage finance and banking products, thus enabling our clients to deal with one entity - Fortis - for all such products. We will continue to expand our fund of fund client base - both on the administration and the on the financing side.
Finally, we will react to developments in all markets. For example, we anticipate a need for a high quality onshore presence in the US to service that market, which is increasingly looking for more transparency and accountability. Therefore, we will endeavour to establish a significant presence in the US market.
HW: Finally, looking at broader challenges to the industry, what are your views on regulation?
AC: Like it or loathe, regulation is here to stay. At one point, hedge funds were the preserve of ultra high net worth individuals. More recently, however, institutional investors are increasing their allocations to hedge funds (which of course means that retail investors are also being exposed through their pensions). This feature of the industry, together with increased instances of hedge fund fraud, has inevitably led regulators to conclude that this is an industry that merits a certain degree of regulation. In my view, the key is not for the industry to resist regulation but to ensure that a balance is struck to ensure that there is a healthy degree of regulation rather than a level that stifles the creativity and entrepreneurialism which made this industry such a success story.
I believe that the requirement for US hedge fund managers to register with the SEC and a general trend in the US market towards transparency will eventually lead most hedge funds selling to US investors (be they onshore or offshore funds) to choose to be independently administered. This is clearly good news for Fortis, but should be a very positive development for investors and the industry as a whole. As mentioned above, Fortis will look to enter the US domestic market to service the growing number of managers who will require high quality onshore independent administration.
The FSA regulates the activities of the UK hedge fund managers and no doubt will continue to monitor the industry closely, particularly if the demand for hedge fund investments increases among retail investors. The European financial authorities have not yet formulated a common view on an approach to the industry and I expect that to take at least two years more.