Administrators Overview

   Now, adds Vermut, prime brokers increasingly are redirecting clients to administrators within their own firms. For big banks, administration is just one more service to offer as they try to grow their business with hedge funds. By providing an integrated administration and prime brokerage platform, the banks hope they can increase the dependency of their hedge fund clients.

   Goldman was an early entrant into hedge fund administration, getting into the business in 1991. Today its administrative services operation has offices in New Jersey, the Cayman Islands and Dublin. The objective, says Thackeray, is to seamlessly integrate fund administration and prime brokerage.

   “We feel this is a model that works,” says Thackeray of the firm’s decision to offer both hedge fund administration and prime brokerage. “While the businesses operate independently, clients enjoy greater synergies by having their administrators and prime brokers at one stop.”

   Morgan Stanley launched its administrative platform, Morgan Stanley Fund Services, about 18 months ago — making its third-place finish this year all the more impressive. Like Goldman, Morgan sees synergies between prime brokerage and administration, especially when it comes to technology.

   “We have leveraged our strengths in prime brokerage and extended it to fund services,” says Patrick Mortimer, head of Morgan Stanley’s U.S. prime brokerage group. “We get the benefits of the co-investment.” Like Goldman, it runs its administration business unit independently of prime brokerage and charges clients for its services separately.

   Competition among fund administrators is heating up. Firms are looking to differentiate themselves by adding more services, taking on back- and middle-office functions, risk analytics and P&L reporting. And as firms further automate fund administration, they are increasing their technology offerings to include on-demand access to fund accounting and other services.

   Competition is also leading to consolidation — not surprising for an industry that still has some 70 firms, according to a recent report by Boston-based research firm Celent. Technology companies such as Windsor, Connecticut–based SS&C Technologies, No. 6 overall in the ranking, have entered the fray, buying up smaller administrators.

   Fund valuation and accounting are by far the most important parts of an administrator’s job as far as their hedge funds clients are concerned. “Valuation is a pretty labor-intensive process as hedge funds start to go into more illiquid investments,” says Gary Enos, head of alternative administrative services at Boston-based State Street Corp., which purchased IFS in 2002.

   But some funds criticize their administrators for failing to deal with complex valuations. New York– and London-based hedge fund BlueMountain Capital Management has taken most of its administrative services in-house because the manager found that administrators were not able to deal with the size of its derivatives book or the complexity of many of its holdings.

   As hedge funds continue to chase institutional dollars, they place ever-greater demand on managers to hire a brand name administrator. And as more institutions invest with hedge funds, they too are starting to ask for more from administrators. Hedge fund administration may not be sexy, but as it becomes a more integral part of the hedge fund business, the stakes are getting higher and the contest to be the best is heating up.  — I.R-S.