Custodians Forge Closer Ties With Hedge Funds

Terry Flanagan

The increase in regulations on hedge funds has resulted in closer ties between funds and their administrators.

Regulatory compliance experts at major providers of custodial and other services are working closely with their hedge fund counterparts to build out products and services to meet regulatory demands for greater investor transparency in the aftermath of the financial crisis.

“From a global perspective, the regulatory and compliance landscape has changed markedly since 2009,” said Ian Shaw, managing director and global head of regulatory control at global custodian BNY Mellon Alternative Investment Services.

“Private fund advisers have had to register, which they didn’t have to do before,” Shaw said. “Most will have to file an ADV, followed by Form PF. Some may have to file CFTC documentation as well. We’re looking at Fatca coming into force in January 2013 for U.S. financial institutions, and also [the European Union’s] AIFMD, which is supposed to be implemented in July 2013. Beyond that, there’s Solvency II, Basel III and MiFID II.”

New regulations are requiring increased accuracy and shorter timeframes.

“Stitching together regulatory reports from two, five or even 20 reports and spreadsheets with inconsistent standards will not cut it much longer,” said Fred Cohen, group vice-president and global head of the capital markets and investment banking practice at iGATE, a IT outsourcing service provider.

“Institutions are anxious to rationalize and centralize, logically or physically to get more accurate results faster and cheaper.”

The good news is that fund administrators are investing in people and technology to negotiate this avalanche of new regulations.

A big advantage in this regard is the ability of fund administrators to aggregate the reams of data they create on behalf of their hedge fund clients for reporting and compliance purposes.

“Compliance with these regulatory initiatives revolves largely around data management,” Shaw at BNY Mellon said.

BNY Mellon is a leading administrator of alternative assets, including single manager hedge funds, funds of hedge funds, and private equity, with more than $525 billion of alternative assets under administration and custody.

As a fund administrator, BNY Mellon is in a position to not only provide data, but also the technology to assist in data management. “To the extent data is resident on our systems or others, and they need to enrich it, we want to be in that space,” said Shaw.

Custodians have become increasingly pro-active in building services for hedge fund clients.

According to a report by BNY Mellon and research firm Finadium, hedge fund assets available for prime custody services now stand at $684 billion, a 40% increase since 2010. The increase reflects growth in overall hedge fund assets under management as well as lower levels of borrowing form prime brokers.

‘Prime custody’ refers to the tailored servicing of assets within alternative investment portfolios performed by both prime brokers and custodians to provide greater transparency and risk mitigation.

Roughly half of all hedge funds with more than $1 billion in AUM are now thought to have a prime custody arrangement in place, up from 15% in 2009, as funds seek to mitigate counterparty risk, according to the BNY Mellon/Finadium report.

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