Asia: More service providers, please!
“The only real worry I have in this industry,” says one head of an Asian hedge fund, “is that the service providers to managers – the hedge fund administrators, the accountants, the lawyers – are becoming an oligopoly. There are just not enough of them.”
He is not alone in his opinion. A constant gripe among managers of Asian hedge funds based in Asia is that they have a limited choice of service providers. As it stands in the hedge fund administration sector, HSBC dominates the regional landscape, with Fortis a far-off second, and Citco, which is the largest on a global basis, a close third. After those three, there are some newer entrants but they have yet to become serious contenders.
Hedge fund administrators admit that demand for their services has increased by leaps and bounds. Colin Lunn, of HSBC’s Alternative Fund Services (AFS), says his firm’s assets under administration in Asia have increased by 140% since January 2004. This more than mirrors the Asian market, which has grown by $95 billion in the same period, Lunn says.
With limited competition, hedge fund administrators in Asia can be relatively choosy about which managers they take on. This can be both positive and negative. AFS has been dropping some smaller managers from its books, for example. Lunn says it is natural to stop dealing with funds that have not had any real growth over the past two or three years, as “it is uneconomical for the firm and diverts resources from the managers that have been successful”. It makes it harder for smaller funds to get out of the gates but it also means that there are barriers to entry in the Asian hedge fund market, which should mean a faster maturation of the industry.
“Managers need to have a critical mass to support the infrastructure that sophisticated investors demand. This isn’t just an Asian phenomenon,” says Stewart Bent, head of new business for Asia Ex-Japan at Fortis Prime Fund Solutions. He points out that, traditionally, US offshore fund managers did their own administration in-house. Now, as one manager adds: “If you don’t have a well-known and highly regarded administrator mentioned in your paperwork, investors will not take you seriously.” It is the same when it comes to accountants, prime brokers and law firms, he says, for which there is also less choice in Asia than in the US or Europe. With more blue-chip service providers than smaller unknown players in the market, one might argue that fraudulent activity could be deterred, but the manager complains that less choice implies worse service. “We have to hand-hold some of these service providers and tell them exactly what we want,” he says. “And, given that the turnover of staff is so great, especially among administrators, it can be very frustrating and a little worrying.”
As elsewhere in the industry, administrators find that the pool of talent in the market is not growing in line with demand. Staff are often lured away to managers to work in their back offices by higher salaries and a more personal working environment. With demands on salaries among service providers it is inevitable that Asian managers will face increases in fees. The pressure will be on for smaller funds unless more service providers enter the market.
