One could say Madonna owes a great deal of her multi-decade success to her ability to “reinvent” herself and keep pace with the ever-changing music scene. The hedge fund administration industry could learn a thing or two from this strategy. Hedge fund “admins” are perfectly poised to capitalize on the recent changes to the financial services landscape and the new face of the $2+ trillion hedge fund industry.
Without making any changes to their service offerings, these changes represent more money-making opportunities for hedge fund admins. More funds equal more potential clients and higher assets under administration. However, if hedge fund admins revamped their services with a more comprehensive offering at a lower price point, they could really cash in. By going beyond the traditional services, such as net asset value (NAV) calculations and determining fair value of each security, hedge fund admins can position themselves ahead of the curve. This would help admins meet market demand at a fee attractive to hedge funds, who have historically expected their fund admins to provide more and more services for the same fee.
Given the fact that the concept of a single prime broker is a thing of the past, many services traditionally provided to the hedge funds by their prime broker are no longer possible. This has opened the door for the hedge fund admins to offer these new services as some have done, but not yet at an attractive price point. Unlike prime brokers, hedge fund admins cannot make up the cost of providing these services via other mechanisms, such as financing, stock lending or trade execution fees. In order to provide this level of additional service, the hedge fund admin’s only recourse is to raise fees. Yet the hedge funds have resisted this.
Change on the Horizon
Right now, many hedge funds are looking to other, pricey service providers for services they previously were receiving from their prime broker. To capture some of this business, the hedge fund admins can market themselves as an economical, one-stop shopping solution. They could say to the hedge funds, “if we provide service X to you for a cost of $Y, you can save at least that much when you stop using consulting firm ABC to provide service X.” The hedge funds are listening. They want to lower costs. This would make it easier for them to go after the increased dollars flowing into hedge funds and to tap into the growing amount of institutional dollars entering the market.
The fact that hedge fund admin fees more often than not get passed to investors and are not paid by fund managers can help attract more hedge fund business. What is more attractive to the hedge fund owner is that if they buy service X from their fund admin instead of from a consultant, it is easier to pass the cost of that service on to their investors than if the manager buys the same service from a consultant.
The smart, early adopters of this one-stop approach among hedge fund admins stand to gain by differentiating themselves from the competition, but it’s not without its challenges.
Here is a list of some fund metrics and compliance services hedge fund admins can provide as part of a more comprehensive offering to better meet client/industry demand:
- Daily Reporting: NaV, Net Exposure, Purchase and Sales
- U.S. Tax Analysis: Wash Sales, Constructive Sales, Straddles, QDI and Dividends Received Deduction (DRD) (i.e. create the fund’s tax book)
- Foreign Tax Analysis: Germany (Income, Interim Profit, Equity Gain, Allocation Ratios)
- Risk Management: VaR, Beta
- Performance Analysis: TWR and IRR
- FATCA – for offshore funds
- Regulatory Compliance Reporting: Forms 13F, 13D, and PF; UCITS Fund