Do You Have the Right Hedge Fund Service Providers?

Who fund managers partner with matters.


For hedge fund managers and alternative investment managers looking to make sure their service providers align with institutional client expectations, the names and breadth of experience of your administrators, auditors, custodians, legal, and prime broker team are critical components to long-term success.

Is this then a surprise: Three in ten hedge fund managers have changed at least one service provider in the past year, said Preqin.

A Focus on Due Diligence


Why change partners? According to Preqin, “Examining the length and quality of a fund manager’s service provider relationships has become an essential part of institutional investors’ due diligence processes.” See the Preqin May 2016 report here.

A Focus on Core Competencies


Most managers, not surprisingly, like to focus on what they do best. “The push for more efficient business models has also encouraged an increasing number of fund managers to outsource more business functions to third-party providers, in order to concentrate on their core business of generating alpha for their clients.”

The most outsourced functions, according to the report, were IT (41%), legal and compliance (23%), human resources (16%), back office (15%), operations (7%), marketing and business development (5%), investor relations (3%), and portfolio management (2%).

Table on why funds change providers

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A Focus on Poor Service


Four in ten hedge fund managers changed service providers because of perceived poor service. “As firms grow their assets under management (AUM) and increase the number of investors that they are dealing with, they may find that some of their service providers are no longer suited to their business; equally, these managers may feel that they are not receiving an adequate service from their service provider, or need to cut costs.”

A Focus on Increased Pricing


Two in ten fund managers have had at least one service provider raise their fees in the past 12 months. While not true of all fund managers, a few may see this as a pass-along cost. “Many of these costs are ultimately paid for by investors,” said Preqin, “Either through management fees or specific expenses pass-through charges.”

Do fund managers think their clients are concerned about increased service provider cost? 42% were just not sure, 37% said not, and only 21%, according to the Preqin study, said that increased service provider fees was an issue.

Who in the service world is growing? While past is not prologue, of course, Morgan Stanley Prime Brokerage has been a major player in fund launch business in the last two years. According to Preqin, “37% of hedge funds launched since the beginning of 2015 are serviced by Morgan Stanley Prime Brokerage.”