Consolidation in the hedge funds administration industry has been picking up pace in the last two years. And even though it has somewhat slowed in the last few months to keep pace with global market conditions, there are signs of further consolidation in the pipeline.
The latest hedge fund administration report by the strategic consulting firm Celent notes, "The fund administration space has become a battlefield for a wide range of players seeking to capitalise on the hedge fund outsourcing trend. As prime brokers and big banking institutions are aggressively expanding their offerings to include fund administration services, they have generally adopted a buy-and-grow strategy rather than retooling long-only fund administration systems or building from scratch."
Large-scale acquisition activity and institutional money's outspoken preference for blue chip administrators have led to an increased level of asset concentration in the marketplace for hedge fund administration. The big players' focus on large funds, however, leaves a void in the marketplace and creates opportunities for smaller and more flexible administrators willing to take on start-ups and independent boutiques, according to Celent.
As global players seek to increase their capacity and capabilities, and the smaller players look to survive, consolidation will play a key role. While, in the past, much of the consolidation was to gain expertise in specific areas and also to increase scale, this time consolidation might come in the form of necessity - with many firms struggling to keep finances under control, selling off certain businesses may be the only way out for some.