Wed, Oct 26, 2016
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

BNY Mellon: Custodian banks will ‘fill the void’ in delivering prime custody to hedge funds

Wednesday, October 05, 2011
Opalesque Industry Update - Emerging models in U.S. and Europe are leading hedge funds into new relationships with prime brokers and custodian banks to safeguard assets

In a new opinion piece, BNY Mellon CEO of Alternative and Broker-Dealer Services Brian Ruane argues that recent industry and economic events will see custody banks continue to play a larger role providing services to hedge funds that previously were the sole domain of prime brokers.

The paper, ‘Filling the Void: Transparency and the Rise of Custodian Banks,’ was presented to more than 150 client and industry attendees at recent events in Dublin and London. In it, Ruane writes that due to stricter regulations following the credit crisis – from Dodd-Frank to the AIFM Directive – alternative fund managers are being compelled to reevaluate the right balance between counterparty exposure and a higher degree of safety. Ruane says this is creating distinct operating models for hedge funds in the U.S. and Europe.

Following the crash in 2008, U.S.-based hedge funds sought out custodians to safe-keep and service their unencumbered cash and securities. Through a custodian bank, hedge funds had the assurance not only that their un-invested cash balances were 100% FDIC insured through 2012, but also that securities would be kept off the custodian’s balance sheet and assets couldn’t be rehypothecated. Services traditionally reserved for prime brokers, such as clearing, cash and collateral management, became components of a service partnership between primes and custodians.

The second model is the evolving European interpretation of prime custody. In Europe, hedge funds primarily use custodian banks to provide collateral management services on initial and variation margin. But European-based hedge funds are increasingly showing interest in custody services for their unencumbered assets as well. Driven by the need for greater asset protection and control, hedge funds in Europe are pushing prime brokers toward service models similar to those found in the U.S.

“The universe of companies providing key services to hedge funds has shifted dramatically. Hedge funds have gained a new appreciation for counterparty risk and financial strength and started to look at another group of service providers - custodian banks,” said Ruane. “Alternative investment managers in the U.S. and Europe, as well as the more institutionally focused managers in Asia, are looking to custody banks as financial intermediaries who can deliver a seamless offering.”

Ruane says the two models are evolving to meet the demand for asset protection through improved transparency. In the U.S., several prime brokers have created partnerships with custodians. These partnerships enable prime brokers to maintain their current relationship with their hedge funds, while offering the fund the ability to hold assets with a third-party custodian. Interest is expanding to European shores as well.

Click here to view or download the paper.

(press release)

BNY Mellon Alternative Investment Services (AIS), a leading fund administrator of alternative assets including single manager hedge funds, funds of hedge funds and private equity, has more than $450 billion of assets under administration and custody and an extensive global presence. In addition to administration and custody services, BNY Mellon offers cash management, foreign exchange, collateral management, corporate trust, and wealth management to the alternative investment industry.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $26.3 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.7 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).


What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. M&A - U.S. hedge fund HarbourVest is shock winner in the £1.1bn SVG Capital takeover saga, Hedge fund Parvus shows hand, toppling William Hill merger deal[more]

    U.S. hedge fund HarbourVest is shock winner in the £1.1bn SVG Capital takeover saga From The fierce battle to buy Britain's biggest private equity group has come to an unexpected conclusion, with the original bidder walking away with the prize. SVG Capital has agreed

  2. Marc Lasry: Energy is still a phenomenal opportunity[more]

    From Distressed debt specialist Marc Lasry said energy debt is still a "phenomenal opportunity" because investors can get "massively overpaid" for the risk they take on. There are "huge opportunities" in the energy sector especially in restructurings, the Avenue Capital Group CEO said Tues

  3. Opalesque Exclusive: Ex-SAC manager re-emerges with market neutral hedge fund[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: A manager re-emerged from the SAC battleground last year to launch his own hedge fund under the umbrella of New York-based investment firm Endicott Group.

  4. North America - Hedge-fund manager Kyle Bass says the U.S. is on track for stagflation, Billionaire hedge fund titans Dinan, Lasry on election, markets and best investment ideas[more]

    Hedge-fund manager Kyle Bass says the U.S. is on track for stagflation From Kyle Bass, founder of Hayman Capital Management, on Wednesday warned that the U.S. is headed toward so-called stagflation. Stagflation is typically described as persistently high inflation and hi

  5. David Einhorn speaks on passive investing, Mylan, his cheapest stock, the Fed[more]

    From Greenlight Capital hedge fund manager David Einhorn (Trades, Portfolio) joined nine other famed investors on Tuesday to talk about stocks at the annual Great Investors’ Best Ideas Investment Symposium in Dallas. Presenters at the annual conference typically pitch one or severa