The market for alternative fund services is undergoing a major evolutionary shift driven by a number of factors, including continuing growth in alternative investment business, the increased importance of institutions as a source of new investment, and the ongoing consolidation of the investment management and fund servicing industry.
Today the industry encompasses the administration of vehicles investing in longonly equity, fixed income, money market, private equity, venture capital, securitisation and property, as well as insurance structures, hedge funds and funds of hedge funds. Each investment and product segment requires distinct custody and administrative service competencies and skills.
In principle, they share some general concepts such as unit-holder record-keeping, financial accounting, the formalisation of periodic market valuations, calculation of net asset values and reconciliation to a formal record of cash and investment assets, although some structures will not require the formal appointment of a custodian. However, there are custody and administration nuances unique to funds of hedge funds. Unlike traditional instruments which benefit from central securities depositories and wholesale daily price feed providers, within the FoHF arena, pricing, reconciliation and settlement are extremely manual and fragmented.
A second major challenge is the shortening of timespans between valuation cycles for FoHFs. This involves not only the official NAV for the end-user or investor client, but the requirement on the administrator for accurate and timely reconciliation with other providers including prime brokers, underlying hedge fund registrars and custodians. Although historically formal valuations have normally been provided on a monthly basis, many if not most fund managers now require weekly estimates. On the custody side, the trade fulfilment, settlement and reconciliation cycles for underlying hedge fund investments are equally manually intensive. Although the industry may ultimately look to channel settlement through a central depository, currently it still involves a one-to-one relationship between custodians and underlying hedge funds registrars and transfer agents. The intricacies of this task are evident, given that there are estimated to be more than 10,000 hedge funds.
Fund sponsors and institutional investors are increasingly seeking partners capable of providing an integrated, scalable and clientcentric trustee, banking, custody and fund administration service offering. While technology and operational excellence are vital to any servicing arrangement, a truly integrated service offering supported by a relationship management focus is key. Client service and relationship management are vital components of custody and administration. A dedicated relationship manager ensures a 'one person, one face' relationship on the part of the administrator, custodian or bank. Fund sponsors, investment managers and institutional investors can benefit from the integration of all these services through one interface, bringing core facilities together and raising overall service quality.
The industry is also witnessing continued pricing pressure for core alternative fund administration, custody and banking/prime brokerage services. By selecting a service provider able to bundle these services, funds can negotiate wholesale fee tariffs across multiple fund families and in some cases fund domiciles.
Administrators and custodians that seek to remain in this evolving and dynamic industry must show their commitment to investment in both people and technology. The past few years have seen a significant increase in consolidation as service providers choose to make the investment, launch a joint venture with strategic partners or exit the business altogether, and we expect to see this trend increase in the future.
By Alan Brint, head of corporate and institutional relationship management with Royal Bank of Canada (Channel Islands)