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| Now More Than Ever: How The Back Office is Big Business (cont.)
(continued from previous page) The demand for daily reporting also has a cultural component, according to Kip Meadows, head of Nottingham Investment Administration. “There is a transparency issue,” Meadows based in North Carolina, says. “But this is the Internet age; people expect instant gratification in getting data.” That the hedge fund back office is subject to that expectation is telling. In 1989, when Nottingham Investment Administration went into business, it did not even service the hedge fund back office. Now, “it is about a third of our business,” Meadows says. Providing hedge fund administration is today a viable business, and Wall Street has taken notice. When global financial service corporation Citi bought Bisys in 2007 it became a $325 billion alternative asset administration business; $275 billion of that was hedge fund capital. Citi, prior to the buy, had a $50 billion hedge fund administration business. That same year, mutual fund global custody provider State Street Corp. bought IBT. A month prior to that, The Bank of New York and Mellon Financial merged. And activity is not limited to just the marquee-named: Last month, dedicated hedge fund administrator Custom House merged Equity Fund. In hedge fund administration, consolidation is on the upswing. “Some of it is predictable,” notes Alshefski. “Some believe the best way to grow is via merger or acquisition.” Alshefski maintains that SEI is focused on growing organically. “It is good for presenting an integrated solution to your customer,” he says. “Consolidation has helped our business.” Meadows explained consolidation meant “opportunity” in the space, while Howell feels the activity could set off a chain reaction. “The small-to-mid tier will find it difficult to contain cost and keep pace and may look toward consolidation for survival,” Howell says. In consolidation, technology is a factor. The Geneva portfolio accounting system from Advent Software is the back-office technology of choice for the hedge fund industry. SEI is a Geneva user, Alshefski says, while Meadows pointed out Nottingham Investment Administration has a proprietary setup. Even with the same technology, forming a consolidated platform in the wake of a merger is labor-intensive. “It can be hard work getting the technology integrated,” Meadows says. More than ever, outsourcing to a hedge fund administrator is also a key competitive advantage. In 2008, with the industry pressed to make good on its reputation as an alpha generation, the ability to focus on core competency—investing—without the burden of maintaining a back office. “The institutional marketplace does not want the manager bogged down, trying to keep up with their back office,” said Alshefski. “If a manager is doing it himself, he might use a lot of money to meet that requirement, so they are better off. We have seen how a weak back office on the behalf of a manager will put them at a disadvantage.” At this juncture in the era of the hedge fund industry, a disadvantage is something no hedge fund can afford. | ADVERTISERS:
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