Administrators Look to Rebuild Amid Ruins

Hedge fund administrators, after experiencing a one-third drop in assets under administration amid last year's financial-market carnage, are drawing a measure of hope from an unlikely source: Bernard Madoff.

To reassure investors spooked by Madoff's fraud, a number of large hedge fund managers that previously did their own number-crunching have hired outside administrators to calculate net asset value and produce investor reports. That could help top administration firms hold on to their market shares, even as overall assets continue to drop.

If Madoff's massive Ponzi scheme ultimately means more business for fund administrators, that silver lining is hardly visible in a new industry survey that documents in excruciating detail how the steep losses and heavy redemptions that plagued most hedge funds last fall took a toll on administration shops (see table on Page 6). Nearly every firm in the top 25 suffered double-digit declines in assets under administration.

The survey, conducted by Carbon360 Research of New York, found that assets under administration fell to $3.4 trillion at the end of March, from $4.7 trillion a year earlier - a 28% drop. As late as last summer, the research firm was forecasting a single-digit gain for the year ending in March 2009. But that was before Lehman Brothers collapsed, triggering the near-collapse of securities markets worldwide.

Carbon360's numbers reflect some double counting, since they include assets in both single-manager funds and funds of funds. What's more, the fund-of-funds assets include some private equity holdings. Perhaps a truer snapshot of the overall pool of hedge fund assets was the $2 trillion being administered for single-manager funds by the top 25 administration firms at the end of March. That number was down $730 billion - or about 27% - from the year before.

Such volatility has led to major changes in the fund-administration market. Citco kept its No. 1 position, though its market share shrank to 12.4% from 14.3% a year earlier. Big names like State Street, SEI, Bank of New York, Goldman Sachs and J.P. Morgan moved up in the rankings. SEI and J.P. Morgan were among only a handful of firms that saw assets under administration grow. Some firms that were hit particularly hard by the downturn, such as Citigroup, HSBC, UBS and Morgan Stanley, fell sharply in both assets under administration and market-share ranking.

"It was an interesting year," said Gary Enos, vice president of State Street's Alternative Investment Services, which jumped to No. 2 in the latest survey even though its assets under administration plunged 20 percent. "Everyone predicted the death of the industry, but you get better quality with the thinning of the herd."

For its fourth-annual survey, Carbon360 - which recently changed its name from CarbonBased Consulting - canvassed 130 firms. That's up from 100 administrators the year before, despite the closing of two firms: Vanthedge in New York and Fortune Administration in Freehold, N.J.

Brian Shapiro, a senior research fellow at Carbon360, said he doesn't believe the bleeding is over. While many hedge funds have posted strong gains so far this year, investors continue to pull out capital, whittling down assets under management. "People are still pulling out," he said. "We're not going back to the Stone Age or going to be living on Spam, but I can't see this trend improving this year."

Enos, of State Street, offered a more upbeat forecast. He believes money will flow from the sidelines into quality hedge funds and administration firms before the year is out.

"The established firms, because of performance, over time will get their investor base back and grow," he said. "And new names will emerge."

T. Andrew Smith, executive vice president at Butterfield Fulcrum, said he views the recent flurry of fund launches as positive. But he said the Madoff scandal and the economic crisis are still driving changes in the industry.

"Investors want more transparency and a willingness to open separate accounts," he said. "Fortunately, we have two or three major [firms] that only do separate accounts. While everyone else was getting assets pulled, they were getting new subscriptions."

Managers of commingled funds, meanwhile, are feeling increasing pressure from investors to hire independent administrators. Earlier this year, Union Bancaire Privee, a large fund-of-funds operator, threatened to pull out of hedge funds that didn't employ administrators. Some big hedge fund managers, among them Caxton Associates, D.E. Shaw and Millennium Partners, have either hired independent administrators or pledged to do so.

"Clearly, the post-Madoff world has benefitted organizations with the reputation and infrastructure we have," said John Alshefski, a senior vice president with SEI's administration arm. "We've been not only fortunate with our client base holding up well, but we've been fortunate with new business wins."

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