Trends in Hedge Fund Administration 2008

September 2, 2008

Abstract

New York, NY, USA September 2, 2008


The expansion of third party hedge fund administration continues at a remarkable pace. With the hedge fund industry undergoing seismic shifts, however, administrators are faced with a formidable set of business and operational challenges.

The hedge fund administrator’s role is evolving, and the product "fund administration" is expanding. Funds are looking to their administrators for expanded valuation and reporting capabilities as well as greater middle office functionality, collateral management, risk reporting, and compliance services. In addition, administrators are gearing up their offering to grab a share of the rapidly growing market for fund of fund administration. In a new report, , Celent offers a broad view of the trends and drivers in this space.

Continued growth of the hedge fund industry stands out as a capital driver of the hedge fund administration market. As competition heats up, the majority of hedge funds have opted to unload the burden of maintaining a back office in order to free up resources to allocate to their core activities--trading and generating alpha. Additionally, increased fund complexity and shifting sources of capital have created an incentive environment that is highly conducive to the outsourcing trend.

Alpha/beta bifurcation and greater levels of competition have made alpha generation an increasingly difficult proposition for hedge funds. Growing fund complexity has forced administrators to adopt a broader business model. Today, administrators are providing a host of added-value services in the middle office area. More complex products and strategies have also had a direct effect on administrators’ traditional suite of services, requiring them to develop a thorough understanding of new products and strategies and to enhance their valuation capabilities accordingly. What is more, pension fund money comes with demands for increased fund transparency, which raises reporting standards for administration firms.

For industry needs to be met, fund administrators are revisiting their operational infrastructures in terms of technology, organization, and staffing, as well as geographical footprint. As hedge funds have become more discriminating in their choice of service providers, the administrator’s risk management and controls have been propelled into the spotlight. With fund managers’ increased focus on the quality of services and operations, price sensitivity and pricing pressures have abated.

"We anticipate that, in an analogy to the hedge fund industry, the administration space will experience further ‘barbelling,’" says Isabel Schauerte, an analyst with Celent’s Securities & Investments Group and coauthor of the report. "The ongoing institutionalization of hedge funds will ultimately lead to a two-tiered market, with large multi-service administrators on the one hand and niche players left to service startups and independent boutiques on the other," she adds. 

The 48-page report contains 17 figures and six tables. A table of contents is available online.

Members of Celent's Capital Markets research service can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
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Tel: +44 (0)782 448 3336

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Yumi Nagaoka
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Table of Contents

New York, NY, USA September 2, 2008

Executive Summary 3
Introduction 5
Relevant Hedge Fund Industry Trends 6
  Growth Dynamics 6
  Alpha/Beta Bifurcation and Hedge Fund Complexity 9
The Era of Self-Administration Is Coming to an End 12
  Growth of the Hedge Fund Administration Market 12
  Growth Drivers 13
Dynamics in the Provider Market 15
  View from the Top 15
  The Expanding Provider Market 16
  Acquisition Activity 18
  Playing the Niche Card 19
  Geography of the Provider Market--Dublin and Beyond 21
Industry Trends--Taking Fund Administration to the Next Level 24
  Middle Office Services 24
  Enhancement of Traditional Services 29
  Gearing Up for Fund of Hedge Fund Administration 32
  Private Equity Fund Administration--A Distinct Playground 35
The Administrator's Operations in the Spotlight 37
  Globalization of Business Operations 37
  Evolution of the Operational Model 38
  Corporate Controls--SAS 70 42
Looking Forward 44

 

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