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2006 Alpha Awards - Top Administrators

Hedge fund administration isn’t sexy. Administrators perform the basic but necessary behind-the-scenes services a hedge fund must have to operate.

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Hedge fund administration isn’t sexy. Administrators perform the basic but necessary behind-the-scenes services a hedge fund must have to operate. They are responsible for fund accounting, net-asset-value calculations and fund transfers, as well as risk analysis and investor relations. Administrators serve both the hedge fund and its investors, acting as an important liaison between the two and a window into fund activities. In an environment that demands increasing transparency and accountability, the role of the administrator is critical.

“We are the crossroads,” says Cory Thackeray, managing director and head of Goldman, Sachs & Co.’s adminis-trative services group.

Goldman wins the Alpha Awardª for top overall fund administrator. The firm, which improves upon its second-place finish a year ago, receives praise from clients for customer service, as well as for the timeliness and accuracy of its NAV calculations. Last year’s winner, International Fund Services, drops to No. 4 behind Admiral Administration and Morgan Stanley, both of which are making their debut as Alpha Award finalists.

Goldman takes top honors by a sizable margin. The firm wins three of the four administration scoring categories — client service, fund accounting and transfer agency — narrowly losing to Admiral in middle-office services. (We did not include the score for fund-of-hedge-fund services in calculating the overall winner because not all firms provide them.)

Although second-ranked Admiral is smaller than many of its competitors, the firm is one of the biggest independent operators in the Cayman Islands. Admiral has $25 billion in assets under administration; Goldman has $138 billion. Clients say that by keeping its asset base small, Admiral is able to provide more customized, better service.

Many of the biggest hedge fund administrators don’t fare well in this year’s ranking. Citco Fund Services, the industry leader with more than $375 billion in assets under administration, falls to No. 7 from No. 3. Bisys Alternative Investment Services ($200 billion) and Fortis Prime Fund Solutions ($215 billion) finish No. 8 and No. 10, respectively. HSBC Alternative Fund Services, second only to Citco with $248 billion in assets under administration, doesn’t even rank in the top ten.

As with their other service providers, hedge funds typically place a high premium on the level of customer care they receive from administrators. Often, the bigger administrators are criticized for being impersonal and not meeting expectations; many clients prefer their boutique rivals.

The success of Goldman and Morgan Stanley in this year’s ranking demonstrates the growth in popularity of administrators owned by investment banks. Their firms have the deep pockets to provide the type of high-touch customer care that hedge funds want. They also have the name recognition and experience valuing complex securities that hedge fund investors like to see. Stephan Vermut, founder of San Francisco–based boutique prime broker Merlin Securities, believes that more and more banks will acquire or build out administrative platforms as they separate these services from the prime brokerage side of the business.

“Prime brokers are becoming brokers again,” he says. “They will custody assets; they will transact and finance. Anything else the client wants, they are going to say, ‘Go see your administrator.’”

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.

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