As the demarcations between traditional long strategies, private equity and hedge funds blur, what impact will this have on fund administration?

Liam McNiffe at Bank of Ireland Securities Services has very clear ideas about the blurring of lines within the hedge fund industry. “It was never envisaged that Ucits and hedge funds would ever be mentioned in the same breath, but this is now the reality. Hedge funds and Ucits funds have been gradually moving closer to each other with each gradually taking on successful characteristics of the other. The dividing lines have indeed blurred,” he says.

“A change of mindset is required in moving from the servicing of traditional long strategies, benchmarked, daily deadlines, to private equity or hedge funds with return volatility, monthly deadlines. In a daily environment automation of trade capture and reconciliations is the key to a cost-effective and controlled process. Experience of a daily environment will be an advantage as differences continue to blur,” he concludes.

Peter Hughes at Apex says the convergence means administrators have to be flexible. “It is harder to commoditise the service levels of hybrid portfolios.” More attention will need to be given to pricing and ensuring that correct independent pricing is available,” he says.

“There will be more work involved in making sure that fund structures are set up with the scope to be able to meet the changing requirements of the fund managers and their strategies while considering how this fits into an evolving regulatory landscape,” concludes Hughes.

“It is critical to have specialised services for every strategy. For example, BNY Mellon has dedicated platforms to service the diverse needs of private equity, hedge funds and funds of hedge funds,” notes David Aldrich at BNY Mellon.

Hybrid funds that combine elements of long strategies, hedge funds and private equity funds may become more popular as creative investment managers find ways to combine their different trading styles to optimal effect, according to Akshaya Bhargava at Butterfield Fulcrum. “Administrators, as well as lawyers, audit/accounting firms and other service providers, will need to have flexible ways of handling the requirements of these funds,” he says.

“For administrators,” says Bhargava, “the challenges shouldn’t be any greater than they are for a multi-strategy or a global macro hedge fund – a robust accounting/general ledger system and access to independent pricing sources will be important. The requirements for middle-office services and risk analytics will likely be different and will have to be scoped out with the client.”

Oliver Scully at Citco says a larger number of administrators will offer services across all strategy types. “Ultimately, this will lead to greater consolidation in the industry. However, this will very much be over the longer term and will be greatly influenced by the changing regulatory environment,” he concludes.

“Fund administrators need to be nimble in order to adapt to the converging needs of traditional long-only, private equity and hedge funds,” states Citi’s Richard Ernesti.

“To do so, standardised platforms and processes will be essential: storing and reporting on shared data, the ability to handle trail fees, utilising retail distribution channels for hedge funds and being able to handle multiple equalisation methodologies are just some of the areas in which the most effective administrators can demonstrate proficiency,” says Scully.

Hans Hufschmid at GlobeOp believes administrators will need to be more technologically nimble and able to provide greater volumes of data faster, more often and in customised configurations.

“The large, truly global fund administrators that have strong balance sheets, a strong global footprint and the ability to provide multiple services including financing/credit, distribution and investment, trading and execution will win this game in the medium to long term,” declares Paul Stillabower at HSBC Securities Services.

Kleinwort Benson’s Joseph Truelove says companies with a broad experience will be able to cope well because they have the systems and experience of dealing in different asset classes and strategies and they understand the different styles involved. “Niche providers who have historically only serviced one asset class will inevitably find it more difficult to cope,” he cautions.

Ian Headon at Northern Trust says investment managers will increasingly expect fund administrators to have the expertise, specialist systems and services across all asset classes with the flexibility to provide integrated solutions and a seamless flow of data.

“With growing demand from our clients’ investors for merging strategies and new asset structures, we have increased our focus and investment on developing our services and technology to enable us to seamlessly deliver a fund solution supporting all of the asset classes above across a single integrated global platform,” he says.

Administrators with capabilities to process the unique complexities of each strategy and the associated structures will be well positioned, says Omnium’s John Buckley.

Deborah Yamin at State Street believes the increased convergence between traditional long strategies, private equity and hedge funds “poses a new set of challenges for niche providers that do not have a broad range of expertise and servicing capability to service a variety of hybrid fund structures.”

She says fund administrators with a “diversified and proven track record of understanding the intricacies of both hedge fund and private equity fund servicing along with the experience supporting ’40 Act and Ucits fund structures will be best positioned to address evolving client investment strategies.”

More traditional administrators that prefer the plain vanilla business will find it difficult to grow, warns Jonathan White at Viteos Fund Services. “For the administrator that can service the more esoteric fund structures and asset classes this will not really have a prolonged impact, apart from perhaps the need for some technology enhancements in the short term,” he says.

“One of the problems with the gates and suspensions during 2008 and 2009 was that traditional hedge funds, which were, to a large extent, liquid, had taken in private-equity investments, which were, to a large extent, illiquid,” explains Dermot Butler at Custom House. “It is my expectation that, after the traumatic shock of the liquidity crunch, most managers will match liquidity terms of their funds with the liquidity of the underlying assets, and certainly, investors will be on the lookout for that.”

So he thinks there might be a “blurring in the demarcation of the managers who follow these three strategies but the actual strategies and the funds representing those strategies will not blur.”

“I do not think there will be any impact on fund administration. The traditional long strategies will carry on as they have and the private equity and hedge fund sectors will just have two stand-alone funds. Thus, you could say that administrators will have two clients, as they used to have several years ago, instead of one client, as they had last year,” he concludes.

Martin Tolcher at Legis Fund Services agrees with Butler. “In the offshore space some service providers are clearly focusing their efforts on specific strategies, especially private equity and venture capital or sticking to only [say] closed-end fund structures,” he says.