The hedge fund services sector in Ireland is at something of a crossroads, with growing evidence that many clients have concerns about the ability of administrators to deliver the range and q
The hedge fund services sector in Ireland is at something of a crossroads, with growing evidence that many clients have concerns about the ability of administrators to deliver the range and quality of services they need, while Dublin has lost the cost advantage it once enjoyed as salary levels and other overheads continue to increase. However, all the indications are that the industry will rise to the challenges it faces, and that while there may be opportunities for new providers in the market, Dublin’s role as Europe’s leading hedge fund services jurisdiction is not under threat for the foreseeable future.
A recent phenomenon observed by Bear Stearns, in its role as a provider of custody and trustee services in Dublin to funds domiciled in Ireland and the Cayman Islands, is that dissatisfaction with some aspects of providers’ services is widespread. A key complaint is that rising staff turnover deprives clients of continuity in their relationship with the administrator, which is often regarded as an important aspect of service quality.
In addition, as hedge fund managers trade ever more complex and sophisticated financial instruments, their requirements and expectations of service providers are becoming more demanding, and asking new questions of administrators. Can the administrator obtain prices for difficult-to-value OTC instruments? Are they using pricing models, or vendors? If pricing models, are they creating their own? Do they have staff with the experience to calculate such prices, and can they cope with the volume demands of a manager that might trade thousands of OTC instruments every month?
The move by some – although not all – administrators into the area of outsourced middle-office services, as managers try to focus more on their core activities of gathering assets and delivering returns, is also creating new challenges, some of them financial. The growing cost of staff is matched by increased investment in technology, particularly among the global custodians and traditional fund administrators that have acquired specialist hedge fund administrators over the past few years.
Still, it’s important to keep the cost issue in perspective. Overheads in Dublin remain lower than in financial centres such as London and New York, and are on a par with Ireland’s main rival as a fund servicing centre, Luxembourg. Worldwide financial services salary costs have soared in recent years, but in general profitability has risen even faster. Administrators would not be in Dublin if they were not making money.
If anything, Dublin is a victim of its own success. Service providers are driving up salary expectations because of their need to expand in order to handle the amount of new business coming into the jurisdiction. It creates a spiral for personnel movements and job openings, but ultimately this is beneficial because it results in new graduates entering and expanding the industry’s skills base.
Ireland has a legal and regulatory framework in place that covers every type of conceivable alternative asset class for professional and qualifying investors: single manager funds, funds of hedge funds, retail funds of hedge funds, private equity funds and property funds. With a growing body of expertise among the lawyers and auditors, and a constant supply of well-educated young people, financial services in Ireland generally – and the hedge fund sector in particular – is in good shape for the future.
By Mark Sweeney and Pascal Lambert – Mark Sweeney is a managing director and head of custody and trustee services at Bear Stearns Bank in Dublin, and Pascal Lambert is chairman of Bear Stearns Bank and a senior managing director and head of European prime brokerage