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UMB focuses on seamless alternative investment fund administration, accounting, investor servicing, and custody services

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UMB provides access to top-tier technology and integrated back-office support for hedge funds, fund of funds and registered alternative funds. Pete Bergman, Senior Vice President – Custody Solutions Manager, chats to Hedgeweek about some of the challenges and opportunities in the hedge fund market and the most significant changes in the past 12 months. 

How are current economic conditions affecting the hedge fund market?

The market has expanded in 2023 prompted by rising interest rates and increased volatility in financial markets. Sophisticated investors are increasingly investing in hedge funds to protect their downside risk, especially in the equities markets. 

UMB Institutional Custody has benefited from this trend in 2023 with a 35% increase in hedge funds serviced during the year, making it one of the most significant areas of growth.

Are there ongoing or planned regulatory shifts for hedge fund firms to be mindful of?

There are two critical ones: 


In May 2024, the United States, Canada, and Mexico are changing the standard settlement cycles from T+2 to T+1. The change has the backing of the SEC and SIFMA and is designed to decrease risk by reducing the length of exposure to trading counterparties. It also lowers the margin requirements for brokers. 

The move to T+1 is significantly different from the previous move to T+2 in 2017. With trade processing times trimmed down to just a few hours, T+1 will require system, operational, and behavioral changes. 

UMB Institutional Custody is currently working with our customers to ensure their trade instructions are automated and testing the full lifecycle—from trade capture, to matching, to settlement.

Enhanced Reporting and Audit Requirements

The rapid growth of the hedge fund industry, especially in the wake of the “meme stock” phenomenon of 2021, has significantly changed the regulatory framework hedge funds operate in..

To increase transparency to the investors, investment managers of private funds who are registered with the SEC must now provide investors with quarterly statements that report details regarding fund performance, fees and expenses.

The SEC is also mandating that registered advisors undergo an annual audit that aligns with its Custody Rule—which is itself changing. The rule ensures that investments are held by a qualified sub-custodian. Changes to strengthen the rule were proposed by the SEC in February 2023. Hedge fund sponsors, advisors and custodians need to monitor rule changes and work with their legal counsel and service providers to update processes and procedures during a 12-to-18-month transition period.

What are the greatest risks facing both your business and your clients at present?

As mentioned previously, the implementation of T+1 reduces counterparty credit risk. But could T+1 increase operational risks, at least temporarily? Hedge funds, as well as brokers and custodians, all must be ready for T+1 to be successful. The transaction chain is only as strong as its weakest member. 

Not being ready for T+1 could cause trade fails and substantial increases in compulsory buy-ins. 

UMB Institutional Custody is well-positioned to process trades on time to meet the tight deadlines. We are actively encouraging our customers to perform end-to-end testing with UMB as well as their counterparties.

Another area of real concern is the pervasive level of cybercrime in today’s environment. Business email compromise (BEC) is one of the most dangerous for financial services firms. Fraudsters attempt to gain access to business email accounts and look for emails regarding financial activity. They will then attempt to send fraudulent instructions to wire money into their own account. Through vigilance and safeguards such as repetitive wire instructions and telephone callbacks, these crimes can be thwarted. However, even just one successful BEC attack can be very expensive for the customer.

Where do you see the most significant opportunities for growth in the coming year?

It’s not a new trend, but UMB anticipates continued strong growth in private equity funds, driven by investors seeking greater returns through exposure to either startups or specialty investment strategies such as those focused on M&A. 

Other area of anticipated strong growth include private credit (with a focus on loans to less mature businesses) and funds that focus on tangible assets such real estate and commodities.

UMB Institutional Custody is closely watching for the finalisation of the SEC’s custody rule, which may increase the oversight role of qualified custodians for private investments.

What has been the most significant change you’ve observed in the hedge fund industry in the past 12 months?

Hedge funds face increasing competition both from within their own market and from other investment vehicles, causing downward pressure on revenues even as costs rise. 

ETFs, in particular, provide stiff competition to hedge funds. Their expense ratios are almost always lower. ETFs also offer greater liquidity and tax efficiency. ETFs no longer are tied to specific market indices. In 2019, a change to SEC regulations allowed ETF sponsors to customize their portfolios. Compared to fixed index ETFs, “active” ETFs provide for greater portfolio diversification and liquidity through intraday trading. 

At UMB, our customers look to us for cost-effective solutions. As an example, we can partner with hedge funds to offer trade automation solutions, a Treasury management portal, or outsourcing of subscription document preparation for private investments. 

UMB also offers a bundled funds solution platform called Registered Fund Solutions. By bundling accounting, custody, transfer agency, distribution and compliance services, fund sponsors can launch their products with increased speed and cost efficiency.



Pete Bergman, Senior Vice President – Custody Solutions Manager, UMB Institutional Custody – Pete Bergman is a senior strategy manager in UMB’s Institutional Custody division. He has more than 30 years of financial services experience, with most of his tenure spent working in the dual capacities of custody operations and client service. Pete’s current focus is aligning the division’s technology strategy with the goals of reducing operational risk and further enhancing the client experience. Pete has a BS in Business Administration from Bucknell University and is the Co-Chairperson of the Bank Depository User Group, the national association of Trust Banks.

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