Industry expands service offering

What new services will be introduced over the next 12–18 months?

Administrators plan a variety of services for the coming months. Most of these focus on providing services that support the main concerns of the industry, including counterparty risk, transparency and operational risk.

Administrators that are service-only providers are likely to be challenged, says Matthew Wilson at Citadel Solutions. “We believe the future of administration is in software and services where access to online, real-time information will provide investors  with direct access to the same systems on which the administrator is operating,” he says.

The role of the administrator will become increasingly important to funds and their investors in the future. “We believe that hedge funds will require additional transparency into their data housed on their administrator’s system.  Static reporting will no longer be an acceptable output of administration, and direct, real-time access to data will become a requirement,” Wilson predicts.

Citadel Solutions says it is rolling out technology to facilitate this direct data access in the second quarter of 2009.

The company also believes that as hedge funds expand the number of counterparties and locations where cash is maintained, additional cash-management services will be critical for funds. “As margin and collateral requirements increase, funds will want a service to monitor the margin and collateral calculations more closely. Citadel Solutions is rolling out both of these services in the first half of 2009,” says Wilson.

“As a global bank, custodian and administrator, we are watching with interest how the hedge funds/prime broker model will develop,” reveals Ian Headon at Northern Trust. “It remains to be seen whether the use of leverage will return to the same extent as a number of years ago, and how hedge funds structure their products to provide maximum comfort to their investors around counterparty exposure. We also expect that we will see self-administered funds now look to appoint external administrators,” he says.

A number of areas in its business are manual, particularly at the fund of hedge fund level. The company says it expects some automation in the execution and settlement of fund of hedge fund trades, which will improve automation and reduce errors.

As fund managers attempt to streamline their own operating models in an effort to control costs, they will look to service providers to take on services they believe it is more cost-effective to outsource, forecasts Charlie Woolnough at Fortis. “I would expect these services to vary on a case-by-case basis depending on the specific requirements of the client. However, it is safe to assume that anything that is labour intensive for the manager to perform will be a candidate for outsourcing in the current climate,” he says.

At ACE Fund Services, Mara Alido Spencer expects to see the level of reporting increase in 2009. “Administrators are in a position to offer valuable compliance and performance reports. Funds will rely on administrators to assist with the preparation of customised reports for their investors as a way to optimise communication and reporting,” she says.

The future is about managers receiving more, advises David Aldrich at Bank of New York Mellon. He expects to see customer-specific outsourcing of a huge menu of services, from additional custody, reconciliation, cash management and collateral management for derivatives and for financing.

Stuart Feffer at LaCrosse expects to see additional outsourcing services to support operational, middle-office and other non-admin, non-investment functions at the fund management company. “With assets and fees under pressure, fund managers will increasingly be looking for ways to make their costs variable and scale them to the their new economics,” he adds.

In an environment where revenues have or could shrink, it is unlikely that there will be a focus on new services requiring capital outlays, says Paul Chain at AIS Fund Administration.

Sharon Grosman and Brendan Conlon at SGGG Fexco expect to see middle-office services, portfolio management systems and web-based access to predominate.

Gemini Fund Services will introduce an offshore shared trust solution that will provide a platform that will fully integrate fund governance, compliance and full service administration, according to Andrew Rogers. This solution is expected to lower boundaries to entry, expedite fund launches and allow advisors to focus on raising assets.

Independent valuations for private equity funds will become more common, according to Peter Hughes at Apex Fund Services.

What investors are looking for, says Don McClean at UBS, is a “solid dependable service that they can rely on. It is not necessarily about developing and providing new services, but rather about the delivery of services they can trust.”

Conifer Securities is currently focused on increasing the breadth of reports offered to managers and investors, coupled with the means of reporting such as increased web reporting, according to Jack McDonald. The company thinks the industry as a whole will increase the support of the middle office, for example, reconciliation.

Derivatives represent possibly the biggest current challenge to the administration industry, points out José Santamaria at RBC Dexia. “The overall cost of setting up a middle- and back-office infrastructure for over-the-counter (OTC) derivatives in today’s environment can run into millions, leading many firms, including mainstream traditional investment management groups, to view outsourcing as the only viable option,” he says.

However, while there is a lot of interest in outsourcing the derivatives middle and back office, there are few providers in the market who can provide a truly integrated offering, Santamaria says.

Deborah Yamin at State Street says the company has a strong track record of product innovation that includes areas such as collateral management, risk services and trade operations. “Our operations specialists work closely with our clients to deepen our understanding of their funds. This helps ensure that our innovations are truly client focused. For example, by anticipating increased demand to provide administration support for bank loans, distressed debt and real estate, we are enhancing our capabilities in these areas,” she adds.

Karen Tyrell says its aim is to continue to “enhance our clients’ experience by launching new products, improving the automation and flexibility of our tools and services as well as their ease of use.”

Citi’s hedge fund middle-office solution was launched in December 2008. Using the system, managers can relinquish their middle-office responsibilities, including trade operations and reporting duties, and focus on the core business with the option to customise their middle-office solution, explains Tyrell. 

“Across the industry, we expect to see increased risk and client reporting, increased middle-office services, as well as enhanced value-added services such as anti-money laundering, tax services, and liquidity management services such as projection reports,” says Akshaya Bhargava at Butterfield Fulcrum.

John Alshefski at SEI says its focus is on enhancing existing capabilities “to offer a complete outsourcing solution to the investment manager marketplace. We will continue to enhance our data-management capabilities, our daily reporting environment and further develop our web-based capabilities for managers and investors.”

Administrators will likely gain traction in the new services, particularly middle-office activities such as asset pricing/verification of prices, performance attribution, performance monitoring, risk and compliance, according to John McCann at Trinity Fund Administration.

Online fund performance reporting to investors will address their demands for performance data with greater independence, transparency, speed and frequency, says Hans Hufschmid at GlobeOp. An increased trend to straight-through processing, including tools that focus on both funds and their investors, is expected, according to Hufschmid.

Adrian Hogg at Grant Thornton Fund Administration says his company does not intend to introduce any new services to its clients over the next 12–18 months.