Fund Administrator & Custodian Insights
The alternative investments tide continues to rise. Preqin predicts the alternative assets market will reach $24.5 trillion by 2028, propelled by an 8% annualised growth rate from 2022-28.[1] Yet not all managers will be lifted with it.
Last year, BNP Paribas’ Securities Services unit struck an exclusive referral agreement to take over HSBC’s alternatives fund administration business, which stretches across hedge funds, alternative UCITS, hybrid vehicles and funds of funds. From our conversations as part of the successful retention of HSBC’s fund clients, it is clear conditions have turned less benign, and firms will need to bolster their offering to stay buoyant.
The power of partnerships
To cope with the challenges and take advantage of emerging opportunities, investment firms need to operate more efficiently and scale effectively. That takes focus and resources to do in-house.
The alternative, a method managers are increasing adopting, is to outsource non-core activities across the front, middle and back offices – enabling firms to tackle the tests they face without having to solve them internally. Managers can then concentrate on their secret sauce: generating alpha and nurturing investor relationships.
Outsourcing middle-office activities is a good example of where alternatives managers can offload work and pressure. Help with high-volume, high-touch tasks across areas such as treasury, trade lifecycle management, reconciliations and FX allow managers to scale up transaction volumes and eliminate hefty fixed costs.
The right partnerships can give alternatives managers access to:
- Premium technology – Fully integrated, multi-jurisdictional, cross-asset technology infrastructures that provide highly-efficient support across the transaction and client lifecycle, without the cost of developing/buying and maintaining the advanced platforms needed to stand out.
- Seamless data management – Including the collection, reconciliation and enrichment of a wide range of transactional, lifecycle, referential and pricing data from multiple sources to feed the front office, keep clients informed, and ensure compliance with evolving regulatory frameworks and shortening settlement cycles.
- Specialised operations and IT expertise – Enabling managers to hand off workstreams to experienced teams able to deliver best practice procedures and optimised processes. It obviates the need to recruit and retain for those roles in tight labour markets as well.
- Expansion opportunities – Partners with a global footprint and cross-asset experience can offer the ready-made network managers need to support their geographic, asset and client expansion ambitions, and tap into performance-boosting investment opportunities.
Together, such partnerships can provide alternatives managers with the practical solutions to address their three most critical challenges:
Performance
Across asset classes, managers will have to navigate election uncertainties , existing and potential military conflicts, rising trade barriers, climate change impacts, stubborn inflation, higher-for-longer interest rates, stuttering economic growth and stretched equity valuations.
The challenge for alternatives firms, as always, will be to position their portfolios to deliver strong, uncorrelated risk-adjusted returns that can ride periods of volatility and stand up against their peers and benchmarks. Diversifying into new asset classes and geographic markets, for example, is one way to boost performance, spread risk and give investors access to the exposures they seek.
Satisfying investors
Capital raising and ongoing investor servicing pose further challenges. Managers need to design funds with appealing structures and strategies that chime with investor demands.
That could mean offering managed accounts, or hybrid funds that incorporate a mix of liquid and illiquid positions. Including sub-fund structures allows firms to bring third-party managers into the platform to provide specific exposures. Liquid alternative investments may appeal to a more retail audience and broaden capital raising possibilities. Diversifying the client base by targeting high-net worth segments or investors in untapped jurisdictions opens up new potential capital sources.
Such business development efforts require expert support. Managers must set up the appropriate fund structures in their chosen domiciles. They need access to disparate data sources and market infrastructures. They’ll face detailed investor and regulatory compliance obligations depending on the fund, target investor and jurisdiction. Evolving tax rules and Common Reporting Standard/FATCA reporting responsibilities add to the complexity. And they must meet investors’ increasingly exacting service demands for performance, personalisation, transparency and immediacy.
A tougher fundraising backdrop is complicating manager efforts. Investors are leaning towards bigger fund managers with multiple asset classes, while some smaller firms are struggling to compete against the operational robustness and economies of scale of their larger rivals. Even where they offer a compelling track record and investment strategy, small and mid-tier managers may need help with capital introductions and distribution – with many turning to firms like BNP Paribas that can offer the necessary global support network.
Cost
Containing costs to keep expense ratios in check is a perpetual challenge. The higher cost inflation of recent years has made it an even greater priority.
Talent shortages have fuelled compensation rises. Regulatory compliance costs in general continue to increase, and are further heightened for firms that shift into more regulated offerings such as UCITS funds. Expanding into different structures or entering new asset class/geographic markets similarly raise the operational and technology infrastructure ante.
ESG trends are another consideration, bringing additional regulatory and investor transparency expectations. Integrating dedicated datasets and expertise into investment compliance processes, to equip managers with the information and skills required to understand and monitor the sustainability profile of their investments and resulting compliance with ESG rules, will be critical.
More broadly, investor servicing expectations add to firms’ cost and operational pressures. Investors want more data, delivered faster. Better research. Enhanced risk reports. More responsive interactions with relationship managers. And digitised service touchpoints.
On the other side of the ledger, managers are wrestling with ongoing fee compression. Hurdle arrangements are under scrutiny – as seen with the institutional investors now pushing for implementation of cash hurdles in hedge fund incentive fees.[2] Clearing performance hurdles to generate incentive fees is tougher in any case in more muted market conditions.
More than fund servicing
Whatever their requirements – whether in global markets, fund administration or custody – alternatives managers need a flexible, cross-functional offering that supports their business model and solves their pain points.
BNP Paribas is that partner. As a full-service bank active across the Americas, EMEA and APAC, we combine comprehensive solutions in global markets, administration, custody and depositary services under one roof.
Through our capital introduction panels, we bring alternatives managers and investors together to facilitate fundraising. We can assist with distribution to spread access and bring product to life. Outsourced dealing capabilities alleviate execution workloads. Our industry-leading Exane research capabilities can spotlight investment ideas, trends and risks. And whether it’s support for liquid, illiquid or hybrid strategies , launching a US -domiciled fund, Irish or Luxembourg UCITS vehicle or Variable Capital Company structure in Singapore, or seeking access to custody services in India, we have the integrated offering to help.
That service reach is underpinned by best-in-class technology and a VIP client support model. Dedicated teams are on the ground around the world to provide the human assistance managers seek – be it to escalate an issue, craft bespoke solutions or obtain expert advice. Through these strategic relationships across the bank, and by going the extra mile to meet clients’ needs, we provide alternatives managers with the crucial tools to succeed.
[1] With $20 Trillion in Private Markets, the Lack of Transparency Is No Longer Okay, Institutional Investor, 22 July 2024, https://www.institutionalinvestor.com/article/2dj2yfmbp85ay1lm1c8ow/opinion/with-20-trillion-in-private-markets-the-lack-of-transparency-is-no-longer-okay
[2] Texas Teachers wants cash hurdles for hedge fund fees. Now the pension fund has almost 60 allies in the industry, Pensions & Investments, 23 July 2024, https://www.pionline.com/hedge-funds/texas-teachers-pushes-hedge-funds-use-cash-hurdles