Hedge fund managers are continually reviewing their relationships with fund administrators, fund custodians, prime brokers, fund auditors, fund marketers and law firms to ensure that they are getting the services they need.
A quarter of all hedge fund managers surveyed by Preqin at the end of 2016 changed at least one service provider over the previous year.
Of these, 75 per cent changed one service provider, 18 per cent changed two, while 7 per cent changed three or more service providers over the year.
Managers had two leading concerns when changing service provider: cost and quality of service.
Firms that switched administrator, custodians, auditors and law firms most likely did so because of cost, while those that changed prime brokers and marketers mostly did so for reasons of dissatisfaction with the service they received.
The majority of firms (55 per cent) cited cost as a key reason when changing service provider, with 21 per cent citing dissatisfaction of service. Growth in a hedge fund’s AUM (20 per cent), investor concerns about the service provider (19 per cent) and coping with regulations (15 per cent) were also factors when changing service provider.
Of those that changed service providers, the largest proportion (39 per cent) of hedge funds changed their prime broker and the smallest proportion (19 per cent) changed their fund custodian.
During 2016 – Q1 2017, the Big Four (KPMG, EY, Deloitte and PwC) audited 79 per cent of all hedge fund launches, and 93 per cent of hedge funds with USD1 billion or more in AUM.
Morgan Stanley Prime Brokerage serviced 30 per cent of hedge fund launches in 2016 – Q1 2017, and is the most commonly used prime broker for hedge funds based in Europe, Asia-Pacific and Rest of World.
Of the hedge funds that changed service providers, 20 per cent changed their law firm, with 42 per cent citing cost as a leading reason for the switch and a third citing dissatisfaction with the quality of service.
The majority of marketers work with one, two or three hedge funds, although a notable proportion (14 per cent) work with ten or more hedge funds.
“Service providers are a vital part of the hedge fund landscape, assisting in the smooth running of operations. They perform a range of vital services in the industry, such as custody and valuation of assets, facilitating securities lending, providing advice on regulation and fund terms, and assisting with the fundraising and investor subscription processes,” says Amy Bensted (pictured), head of hedge fund products. “In order to retain hedge fund clients and win new business, service providers need to address concerns over cost and quality of service, particularly as investor scrutiny over fees and performance continues to grow. These firms will need to maintain a careful balance by improving their service offering while still reducing costs.”