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Industry Updates

Hedge funds demand value from service providers

Thursday, May 11, 2017
Opalesque Industry Update - Hedge fund managers are continually reviewing their relationships with fund administrators, fund custodians, prime brokers, fund auditors, fund marketers and law firms to ensure that they are getting the services they need. A quarter of all hedge fund managers surveyed by Preqin at the end of 2016 changed at least one service provider over the previous year. Of these, 75% changed one service provider, 18% changed two, while 7% changed three or more service providers over the year. Managers had two leading concerns when changing service provider: cost and quality of service. Firms that switched administrator, custodians, auditors and law firms most likely did so because of cost, while those that changed prime brokers and marketers mostly did so for reasons of dissatisfaction with the service they received.

Key Hedge Fund Service Provider Facts:

  • A quarter of hedge funds surveyed by Preqin changed at least one service provider over the previous year, of which 75% changed just one service provider.

  • The majority of firms (55%) cited cost as a key reason when changing service provider, with 21% citing dissatisfaction of service. Growth in a hedge fund's AUM (20%), investor concerns about the service provider (19%) and coping with regulations (15%) were also factors when changing service provider.

  • Of those that changed service providers, the largest proportion (39%) of hedge funds changed their prime broker and the smallest proportion (19%) changed their fund custodian.

  • During 2016 - Q1 2017, the Big Four (KPMG, EY, Deloitte and PwC) audited 79% of all hedge fund launches, and 93% of hedge funds with $1bn or more in AUM.

  • Morgan Stanley Prime Brokerage serviced 30% of hedge fund launches in 2016 - Q1 2017, and is the most commonly used prime broker for hedge funds based in Europe, Asia-Pacific and Rest of World.

  • Of the hedge funds that changed service providers, 20% changed their law firm, with 42% citing cost as a leading reason for the switch and a third citing dissatisfaction with the quality of service.

  • The majority of marketers work with one, two or three hedge funds, although a notable proportion (14%) work with ten or more hedge funds.

Amy Bensted, Head of Hedge Fund Products:

"Service providers are a vital part of the hedge fund landscape, assisting in the smooth running of operations. They perform a range of vital services in the industry, such as custody and valuation of assets, facilitating securities lending, providing advice on regulation and fund terms, and assisting with the fundraising and investor subscription processes.

In order to retain hedge fund clients and win new business, service providers need to address concerns over cost and quality of service, particularly as investor scrutiny over fees and performance continues to grow. These firms will need to maintain a careful balance by improving their service offering while still reducing costs."

The full report is available here.

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