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Portfolio > Alternative Investments > Hedge Funds

Acquisitions May Not Change Fundamentals of Fund Administration Business

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NEW YORK (–Mainstream companies have been buying hedge fund administrators, but the latter continue to function much as they did before.

“Consolidation is not the same as acquisition,” said Dermot Butler, chairman of Custom House in Dublin, an administrator that has remained freestanding. “What’s happening is that large administrators are adding on hedge fund businesses to complement their traditional operation.”

It’s not that traditional administration and hedge fund administration are being fused together, he said. The two remain separate–hedge fund administration differs from mutual fund administration, which tends to be more of a mass production process.

“They’re running two different businesses,” said Mr. Butler. However, a hedge fund administrator owned by a large company tends to focus on big funds. That leaves a growing niche consisting of thousands of little funds.

An estimated 75% of hedge funds have less than US$100 million in assets. These funds used to do everything themselves but increasingly are hiring outside administrators in order to meet the requirements of institutional investors and regulators.

“It seems to us a huge opportunity,” Mr. Butler said. Custom House works with start-ups. Their growth has fueled its growth–to US$13.5 billion in assets under administration as of the end of March, from under US$3 billion in 2002.

For instance, Winton Capital Management, London, is a client. It was started by David Harding with less than US$20 million and has grown to around US$2 billion in assets. Mr. Harding represents the “H” in AHL, the managed futures program that became part of Man Group plc.

Diversified Portfolio

Another feature of the industry that does not appear to change much is the number of hedge fund administrators. Those that were acquired in effect have just been renamed–there has not been a decrease in hedge fund administrators.

The number is unlikely to shrink in any event, because new ones can spring up to take advantage of the small fund niche. Global Fund Administration Ltd. in Gibraltar is one example.

But start-up administrators, like emerging funds, face extra risk: They are dependent on just a few clients. A diversified portfolio of hedge funds provides steady income for an administrator, said Mr. Butler.

As for whether Custom House might one day give up its independence, he won’t rule out anything–it depends on the size of the check.

A wave of acquisitions started in 2002, when State Street bought IFS, BISYS purchased Hemisphere and the Bank of New York bought IFA. More recently, HSBC bought Bank of Bermuda Global Fund Services and JP Morgan acquired Tranaut.

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Contact Bob Keane with questions or comments at: [email protected].


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