Irish fund administrators are hoping their combined on and offshore expertise will bring them through industry changes.

Ireland holds a unique position in the fund administration world. During the boom years of the hedge fund industry the jurisdiction developed an expertise in administering alternative funds from all over the world, regulated and non-regulated.

Industry participants in Ireland estimate that around 40%–50% of fund administration business in the country involves offshore funds. The rest of the work comes from onshore, regulated funds. The split means that the changing environment for hedge funds potentially puts Ireland in a difficult position.

If the industry ends up looking much like it does today, with managers running both regulated and offshore products in parallel, the country’s fund administrators will thrive. However, if it shifts either radically towards onshore, regulated vehicles, or radically back towards offshore products, Ireland will have to fight for work.

As a result of the financial crisis, Irish administrators saw assets under administration (AUA) drop off. Both large and small operators report the same trend, although the decrease in AUA came at different times depending on the precise operating model and the sort of clients serviced.

The majority of administrators say the main fall in assets came during 2008 when the biggest wave of redemption requests hit the market globally. Dermot Butler, chair of the Custom House Group, says his company rode out 2008 well before seeing AUA drop off in 2009 when the funds and funds of hedge funds (FoHFs) that had survived continued to experience high redemptions from investors.

Moving into 2010, administrators report a renewed flow of business. Many say they have begun to recoup the losses of 2008 with new business and new allocations from investors into the funds run by their clients. However, 2009 was “more of a consolidation year”, says Peter O’Dwyer, director at Trinity Fund Administration.

“We’re delighted to see an upturn in business enquiries, clients getting back into the market and launching new products. It still remains a more challenging environment than it was and fund sizes are not what they were,” adds I an Headon, senior vice-president for product management at Northern Trust in Dublin.

Headon says many clients are not up to pre-crisis levels yet. This is partly due to the average fund size of the funds under administration being lower.

In contrast BNP Paribas’s head of global alternatives operations, Pete Townsend, says the company’s AUA is now above pre-crisis levels. According to Townsend traditional assets helped prop up BNP Paribas during the crisis even though alternative managers suffered.

“There was some liquidation of both traditional and alternative managers but since July or August last year the launches have definitely increased,” he says.

At smaller administrators business is reportedly good. John Bohan, managing director at Apex Fund Services, says there was a “distinct pick-up” from the middle of 2009 and the company has launched “a significant amount of funds”.

“We’ve seen a very strong increase and a very strong shift in growth and a very strong turnaround after the recession,” Bohan says.

The type of work the fund administration companies in Ireland are doing has changed following the crisis. “One of the big trends that we’ve seen in the last six months is some of the traditional offshore hedge fund managers dipping their toes into the regulated space,” says Carin Bryans, managing director of JP Morgan’s Dublin office.

Bryans says because hedge fund managers already understand how Ireland works and what administrators can offer, they are comfortable with the jurisdiction. Likewise, administrators are comfortable with the complex investment strategies hedge fund managers use.

Padraig Kenny, managing director at RBC Dexia, adds: “The convergence story between the long funds that have been administered here in Ireland for the last 20 years and the alternative funds has accelerated very sharply over the last six to 12 months driven by regulations.”

Administrators say this convergence is leading to more enquiries about both Ucits funds and qualifying investor funds (QIFs). Few administrators in Ireland have any difficulty in servicing Ucits funds. Townsend says BNP Paribas, running all its administration business on a single daily NAV platform, finds it simple.

He says the move to Ucits is not a new trend although the use of this product by hedge funds is relatively recent.

“We have clients that are running structured products in Ucits vehicles. As the underlying structured products track well-diversified and liquid indexes, they fit well into the Ucits product,” he points out.

Townsend thinks there may have been a pick-up in the number of hedge fund managers considering a Ucits vehicle for the same liquidity reasons. The “phenomenally successful” Ucits brand makes it especially attractive.

“You will see the number of managers using the Ucits products increasing,” he predicts.

Townsend and others are not universally positive about the prospects for Ucits-compliant hedge funds. The line between what service providers report as hedge fund assets and non-hedge fund assets is already blurring, notes Townsend.

“I’m convinced a lot of people want them but I’m not sure they’ll be able to use them once they have got them,” says Butler of the trend towards for Ucits. He says managers will launch a hedge fund in a Ucits wrapper because it is what investors are demanding at the moment. As a warning he points to past trends that have vanished off the radar, such as 130/30 funds.

Butler adds: “I’m just nervous that when the music stops there aren’t going to be many Ucits products sitting on the shelves.”

Alternatives to Ucits are also being sought by investors and managers. At Northern Trust Headon says he has been “fascinated” to find a wide range of managed account options on offer. He thinks there is a tangible demand for managed accounts.

Exchange traded funds (ETFs) and structured funds are also currently popular, according to Kenny. He says for RBC Dexia the composition of the company’s client book has not changed too much since the financial crisis, with a lot of money market funds and ETFs complementing the hedge fund business.

“The volume of these is so big that the new fund ideas take a long time to represent a significant percentage of the overall market,” Kenny notes. “Where there have been a lot of launches is in structured funds. Everybody is looking at every new possibility that emerges.”

The shift in the types of funds being administered from Ireland is also prompting a shift within the industry, both in terms of the shape of the providers and the way they are working.

On an internal basis more regulated funds require a change in thinking, says Headon.

“If we see a significant shift to more regulated fund vehicles, the core operational processes at the client end and in our operation will need to be tweaked to deal with, for example, Ucits restrictions, counterparty exposure or liquidity management,” he explains.

Kenny says regulated funds can be easier to service for an administrator. “As an administrator there are a lot of very prescriptive rules and the funds have to conform to those rules which makes our job more straightforward,” he says.

There are underlying challenges when it comes to pricing some of the financial instruments being used by managers in regulated products, he notes.

At Custom House Group, Butler says more managed accounts means a greater demand for daily dealing and daily net asset value (NAV) calculation. Butler also points to the liquidity demands of the Ucits vehicle. More frequent valuation periods push the cost up for the manager and ultimately the investor as there is more work for the administrator to do.

Ireland’s own economic woes coupled with a global recession and instability in the eurozone has helped shape the Irish and global fund administration market. This has profoundly changed.

“The consolidation of the industry has been predicted almost since it started but it’s definitely a feature now,” says Trinity’s O’Dwyer.

On a global level the market is undergoing consolidation. BNY Mellon is in the process of acquiring PNC’s Global Investment Servicing group while State Street bought Mourant International Finance Administration, the fund-servicing arm of offshore law firm Mourant du Feu & Jeune, in December 2009.

Both of the takeover targets were present in Dublin, so the deals considerably strengthened the larger administrators’ presence in Ireland.

In Ireland the market has seen some smaller entrants. In 2007 Apex Fund Services continued its global expansion opening an office in Cork while Centaur Fund Services, set up by three former senior Citi fund services employees, opened for business in 2009. Other administrators also entering Ireland in recent years include Quintillion, Admiral and HedgeServ.

Bohan says the office continues to grow and he estimates about 70% of Apex’s business in Ireland is from offshore products, with 30% in Irish regulated structures. That in turn breaks down into approximately 60% Ucits products and 40% QIFs.

He believes the global reach of Apex is an advantage for the Irish office as the company can offer clients links to a wide range of jurisdictions including China, Mauritius and the Middle East.

Bohan and Trinity’s O’Dwyer believe the crisis has been a bonus for smaller fund administrators. While the general decrease in assets under management (AUM) was bad news for fund managers and bigger administrators, this led to some large companies finding that economies of scale made it harder for them to service the now-smaller funds.

“In the early stages of 2009 what we saw was a lot of shedding of smaller funds from the bigger players,” explains Bohan.

O’Dwyer adds: “We haven’t competed directly with the larger players. In fact the large players are a source of business for us.”

At Northern Trust Headon welcomes competition from smaller and larger administrators alike. “It’s all going to be driven by what the institutional investor community wants. If the world by and large remains happy with Cayman funds there’s every possibility the small businesses will flourish,” he says.

Overcrowding risk
Some question how many players the market can take. “What we’re seeing is quite a lot of small, $1 billion to $3 billion administrators around coming in to take the smaller players that the big guys won’t take. They’re going to get a job that matches the fee they’re paying. Eventually these companies will find they can’t exist,” says Butler.

RBC Dexia’s Kenny agrees. He does not think Ireland has room for more fund administrators and believes the model of larger operators is the best one.

“To do things with the right level of quality, the right level of risk control and the right level of back-up means you need to be a player of scale,” he says. “Being a large local player can take you a long way. Looking forward it’s about scale. It’s very hard if you’re small to be successful in the long run if you don’t have a scaleable business.”

Kenny says the global operating model of the larger administrators is more cost-effective, particularly in a more constrained financial environment.

Most Irish administrators have seen revenue shrink as fund AUM fell while costs rose. However, there is some consolation. Before the financial crisis Ireland was in danger of pricing itself out of the market. Bohan estimates the cost of administering a fund in Ireland has now been reduced by 20%–30%.

“As with any business in an economic crisis there’s a lot more focus put on the finer detail of your profit and loss,” notes Townsend. “Every-body has had to become leaner and become smarter with investments. There was a lot less restraint in spending when the hedge fund industry was exploding.”

“I think Ireland has a lot of flexibility in terms of how business structures can be adjusted to meet conditions. In sectors outside fund services Ireland has had to deal with exactly those challenges and has dealt with them extremely well,” adds Kenny.

Most administrators think the Irish fund industry withstood the financial crisis well. They point to surveys carried out by the Irish Financial Services Centre (IFSC) showing that job numbers remained fairly steady during the most turbulent period.

Rather than shedding staff during the crisis, many administrators chose to cut wages instead. While JP Morgan’s Bryans admits this is bad news for staff in the short term, she thinks it could be positive in the longer term.

“Irish fund industry employees have demonstrated a constructive, long-term attitude in facing up to the uncertainty of the financial crisis, in some cases accepting reduced pay or working hours to prevent redundancies. It’s that can-do attitude that we hope will draw people to centre their funds business here,” she says.

Retention of talent has become more important across the board for fund administrators, according to Townsend. He says there is a lot of experience in the Irish market, although universities are also producing promising graduates who want to go into one of the country’s most robust industries.

The challenge for the industry now is continuing to attract fund administration business to Ireland. Participants believe the redomiciliation legislation is an opportunity as it requires funds moving to Ireland to appoint an Irish-based administrator as well as other service providers.

State support
O’Dwyer says the fact the Irish government was keen to adopt the legislation showed a commitment to the fund industry. The resulting publicity was good for the jurisdiction. Although fund administrators have been involved with redomiciling funds before now, the streamlined process is simpler and enables a fund to preserve its track record, notes O’Dwyer.

Administrators believe one driver of enquiries about reconciliation is the EU alternative investment fund managers (AIFM) directive. Although there is continued uncertainty over the directive’s final form, many think it is already pushing managers towards an EU domicile.

“I think being an EU domicile already is an opportunity for Ireland,” says Townsend.

Bryans agrees. “Some of this flight to a regulated product is a reaction to AIFM,” she notes. “We’re so used to dealing with hedge fund managers that it should be an opportunity for us when these managers either need to adjust their funds or set up brand new funds for a different market.”

Despite the potential positives of the directive for Ireland, administrators would still like to see some issues addressed such as the liability of depositaries, valuation and whether funds established outside the EU will be able to market within the EU.

“From an Irish perspective we obviously want things to be in the best interests of the industry. But we’re concerned with some of the detail,” adds Bryans.

Headon says he is concerned the directive is unnecessarily protectionist and is creating confusion within the industry. He agrees if it is driven through the EU legislative process in its current form it is likely to lead to more hedge fund managers choosing to set up Ucits funds.

In the meantime Ireland is preparing itself for the implementation of Ucits IV in July 2011. Administrators are looking forward to its introduction. In particular they think the management company passport, which allows a management company based in one EU member state to domicile a fund in another state without having to set up another management company, will be a significant boost to the business.

Bryans thinks companies may decide to centralise fund servicing in a single EU jurisdiction once Ucits IV is applied. For hedge fund managers choosing to move funds to Ireland from outside the EU, she believes Irish administrators will have an advantage if they can continue to maintain the level of experience and innovation within the country.

High-tech future

Innovation is currently top of Headon’s agenda. He is part of a group of some of the world’s biggest custodian banks which is attempting to bring in a new process for FoHFs to automate the investment, reporting and reconciliation processes on transactions in underlying funds.

Currently, says Headon, the process of sharing information about the underlying funds is manual, slow and “heavily paper based”. He says a pilot group is exploring whether such data could be communicated using Swift.

The group began its work before the financial crisis and was delayed by the turmoil. It is now back on track and intends to send the first message over Swift later this year.

Headon admits the idea is not revolutionary, but says it will overhaul the way the asset class works on one level.

“It just makes the whole way that the industry works more grown up. The intent is that this becomes the norm rather than the exception. It was specifically under the banner of innovation that we started thinking about this,” he says, adding that if successful the system will be rolled out to all major custodian banks.

Fund administrators in Ireland point to such initiatives as examples of the way the industry is helping to drive itself forward.

Both the Irish Funds Industry Association and individual administration companies are looking further afield for new opportunities. Bohan says places like the Middle East are firmly on Apex’s radar. The company recently undertook a roadshow in conjunction with law firm Mason Hayes & Curran and the Irish Stock Exchange to talk to fund managers about the benefits of setting up a Ucits fund in Ireland.

Asia, particularly China, is also a region where Irish market participants think they could find business. Townsend notes that good distribution will be key to the success of this initiative.

Although the crisis hit administrators hard, they are well on the road to recovery and are in a positive frame of mind for the future – whatever initiatives it may bring.

Listing the benefits: the Irish Stock Exchange

Hedge funds have been listed on the Irish Stock Exchange (ISE) for some time. Roseanne Kelly, head of investment funds at the exchange, notes that Irish-regulated products dominate the listings at the moment.

Kelly says although Cayman funds are still listed, “they’re not as frequent as they were”.

Listing volumes on the exchange dropped off during the financial crisis, says Kelly, but they are now returning to levels of activity she has not seen for two or more years.

“We hope to see that trend continue, albeit at a steady pace as opposed to any seismic jump,” she says. The source of funds listed in Ireland has not changed much, Kelly adds. Almost half (45%) of listed funds are run from London, 31% are from the East Coast of the US, with Switzerland and Asia accounting for 5% each of the remaining listings.

Kelly says the exchange had to think about the same issues that concerned the rest of the industry through the 2008 turmoil to ensure investors were treated equally, no matter what was happening to the funds in which they invested.

“It’s been very testing and challenging for all in the industry, us included, in terms of dealing with those aspects,” she admits.

She says the ISE based its rulebook on best practice, benchmarking the listing rules to guidelines drawn up by the US Mutual Funds Association, the Alternative Investment Management Association (Aima) and the Hedge Fund Standards Board (HFSB). It also talks to investors to gauge their needs.

Kelly says the rules meant a lot of funds found they had to de-list during the crisis. “It’s one thing having a rule for best practice but it means nothing unless it’s enforced,” she points out.

Some of the de-listed funds are now returning to the ISE as managers seek ways of reassuring investors about the transparency of their products.

Apex Fund Services’ Ireland managing director John Bohan says listing acts as “quasi regulation” for smaller funds that might find it too onerous to redomicile to a regulated jurisdiction.

At audit firm KPMG partner Garrett O’Neill says some of the company’s new clients are planning to list on the ISE. He sits on the funds listing committee at the exchange and says it is a “very progressive organisation”.

Kinetic Partners Dublin head Killian Buckley says there are good reasons to list both regulated and offshore funds, such as the ability to have a mark-to-market price and published net asset values. He says the majority of new funds that Kinetic is advising at present are listing.

“If you look at what occurred in the world and the issues around transparency and communication within the industry there’s comfort for investors outside the tick-the-box issues. As a comforting and communication forum at the very least, I think a listing is worthwhile. I think the reasons are probably more compelling than they were previously,” Buckley concludes.