NU Online News Service, March 12, 11:39 a.m. – The BISYS Group Inc., a major player in the life insurance and mutual fund services market, now wants to expand into the rapidly growing hedge fund services market.
The New York company recently announced a definitive agreement to acquire Hemisphere Management Ltd., Hamilton, Bermuda, a hedge fund administrator, from Mutual Risk Management Ltd., Hamilton, a reinsurer, for $130 million in cash.
Hemisphere, which has offices in Bermuda, Boston and Dublin, generates about $40 million in fee revenue a year by running 394 hedge funds and offshore mutual funds with about $50 billion in assets. Services include recordkeeping, complying with tax laws and other laws and regulations, and providing corporate secretary and director services.
Although BISYS runs many mutual funds and life insurance operations, its hedge fund unit runs fewer than 10 hedge funds, and those funds manage only $1 billion in assets, BISYS says.
Meanwhile, “we have a number of clients that have already started hedge funds,” says BISYS Chairman Lynn Mangum.
A hedge fund is an investment fund that buys unusual types of assets, such as distressed securities; or adopts unusual investment strategies, such as picking investments that seem likely to do best during market downturns, according to the Hedge Fund Association, Washington.
Federal laws meant to protect small investors require any U.S. investment fund with more than 100 participants to register with the U.S. Securities and Exchange Commission. Hedge funds get around SEC requirements by limiting participation to 100 sophisticated investors. In practice, most participants must start with at least $1 million in their accounts.
Because of the restrictions, hedge funds now handle only $500 billion in assets. Traditionally, the companies managing the funds have been small, independent outfits.
But today many U.S. financial services companies, including many of the companies that hire BISYS to run their mutual funds, variable annuity programs and life insurance programs, are setting up SEC-registered “funds of hedge funds,” or mutual funds that invest in hedge funds, to give clients access to hedge fund-style investment strategies.
One example is the investment arm of The Phoenix Companies Inc., Hartford. The unit recently reported earlier this month that it would work with a well-known hedge fund manager to develop an SEC-registered fund of hedge funds. (See http://www.nunews.com/lifeandhealth/hotnews/viewLH.asp?article=3_7_02_12_4383.xml)
By 2008, hedge funds could be managing as much as $1.8 billion in assets, BISYS predicts.
BISYS executives also believe their company’s mutual fund and life insurance industry connections should help it flourish in the hedge fund market, and possibly to act as a consolidating force.
For now, though, “there’s a lot of players in this industry,” Mangum says.
Mutual Risk has agreed to sell Hemisphere because BISYS persuaded it that reinsurance and hedge fund administration were a poor fit, Mangum says.
Mutual Risk’s current need for cash may have been another factor in the deal.
Mutual Risk, which acquired control of Hemisphere in 1996, needs cash because it has been out of compliance with a covenant concerning its statutory combined ratio since Sept. 30, 2001, according to a registration statement filed with the SEC in January.
Mutual Risk issued its announcement of the Hemisphere deal in a release that also announced the resignation of five of the company’s 15 directors and a decision to hire Greenhill & Company L.L.C., New York, an investment banking firm, to help restructure the company’s balance sheet.
XL Capital Ltd., Hamilton, controls 18.5% of Mutual Risk’s shares, according to the SEC filing.