Preqin: Service Providers Get Shuffled as Hedge Funds Demand More for Less

Hedge funds are demanding more service and lower costs, and that is translating into greater turnover among service providers.

That’s the conclusion of a recent survey by Preqin that found that 25% of all hedge fund managers surveyed at year-end 2016 changed at least one service provider over the preceding 12 months.

The main reasons for the changes: cost and quality of service.

Of the hedge funds surveyed, 75% changed one service provider, 18% changed two, while 7% changed three or more service providers during the year. Hedge funds that changed administrators, custodians, auditors, and law firms said they made the change because of costs, and those that changed prime brokers and marketers mostly did so because they did not like the service they received.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Among the services provided to hedge funds (fund administrators, fund custodians, prime brokers, fund auditors, law firms, and fund marketers), prime brokers were the hardest hit with a 39% turnover. The main reasons cited were quality of service issues, growth in assets under management, and prime brokers asking that the hedge fund find another provider. The most used prime broker was Goldman Sachs.

The second-largest switch in service providers occurred in fund administrators (31%), followed by auditors (28%), fund marketers (22%), and law firms (20%.)

According to Amy Bensted, head of Preqin hedge fund research, “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.”

Another key reason is that the industry is changing. More new hedge funds are being launched and the regulatory environment has accelerated consolidation among service providers, particularly among hedge fund administrators. For instance, SS&C GlobeOpbought the hedge fund administration businesses from Citigroup and Wells Fargo in 2016. This made SS&C Globe Op the largest provider of hedge fund services, as measured by both total number of funds serviced (1,512) and new business acquired. The other largest fund administrators ranked by Preqin are Citco Fund Services (1,304 funds serviced), State Street (International Fund Services with 1,083 funds), BNY Mellon (553 funds), Morgan Stanley Fund Services (495 funds), and Northern Trust Fund Administration (452 funds.)

Tags: Hedge Funds, managers, Preqin, service provider

The Board of Commissioners of the Mexican Federal Economic Competition Commission (COFECE) has fined four retirement fund administration companies a total of 1.1 billion pesos ($58.6 million) for “monopolistic practices.”

The four retirement fund administrators, known in Mexico by the term afores, are Profuturo GNP Afore, Afore Sura, Afore XXI Banorte, and Principal Afore. The COFECE also sanctioned 11 individuals who acted on behalf of the fund administrators.

The agents allegedly agreed to reduce transfers between retirement funds administrators, which the COFECE said reduced competition between the companies to win the workers’ preference.

“The objective of this illegal practice was to reduce commercial expenses, which would have greater benefits for the afores,” said COFECE in a statement. “As it is a market in which it is complex to modify the commissions amount, and in which investments are regulated, the funds administrators sought to increase their profits from a reduction of their commercial expenses.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

COFECE said that because the commissions Afores charge are regulated, transfers are a key source of competition. “In agreeing to limit these,” said COFECE, “the incentives to offer a better service are reduced, and the possibility that workers have to reward or punish their afore according to their degree of satisfaction is eliminated.”

In 2014, of the total expenditure of an Afore, the commercial expenses represented about 34%, and came to be up to 50% of the commission charged to the workers, said the regulator. “These actions, while seeking to reduce the costs of the administrators, were not reflected in better commissions for the clients.”

Implementation of the agreements was monitored through emails in which mechanisms were established to hide the identity of the afores, “which shows that the sanctioned knew about the illegality and consequences of the action,” said COFECE. “In addition, based on data from the sector regulator, CONSAR, it was proven that in the periods in which the agreements were in force, the transfers of accounts between the afores involved were reduced.”

Tags: COFECE, CONSAR, Mexican Federal Economic Competition Commission