05/08/2013

Citco Maintains Lead In Face of M&A Activity

Citco remains the largest hedge fund administrator, though challengers State Street and SS&C GlobeOp achieved big gains in the past year by acquiring rivals.

After buying Goldman Sachs’ fund-administration business in October, State Street’s assets under administration leaped 60% to $615.8 billion at the start of this year, from $385.9 billion a year earlier, according to Hedge Fund Alert’s Manager Database. Meanwhile, the assets handled by SS&C jumped 525% to $576.8 billion following its merger with GlobeOp last June (see ranking on Page 6).

Industry pioneer Citco, which administered George Soros’ first offshore fund starting in 1969, posted a 10% increase in assets under administration, to $816.5 billion, without pursuing any acquisitions. That amounted to an industry-leading 21% market share, followed by 16% for No. 2 State Street and 15% for No. 3 SS&C. Rounding out the top five were BNY Mellon (10% share) and Northern Trust (5%).

Industrywide, gross assets under administration for SEC-registered fund operators hit $3.9 trillion, up from $3.3 trillion a year earlier. Meanwhile, the 10 largest administrators claimed a significantly larger chunk of the pie, with a combined 84% market share versus just 71% a year earlier. All 10 leaders recorded gains in assets under administration, with the group up 49% to $3.3 trillion.

The dominance of big administrators is a trend that’s likely to continue. “All things being equal, bigger is better because resources can be scalably applied in an increasingly cost-conscious environment,” said Jim McKee, who oversees hedge fund research at investment consultant Callan. “The smaller player’s pitch of better customer service today will likely be offset by the larger player achieving more client productivity from greater investments in technology.”

Fund administrators handle a range of back-office functions for fund managers, including independently verifying net asset values and performance, reporting to investors and processing subscriptions and redemptions. For years, such operations routinely were handled by hedge fund managers in-house. But following the financial crisis and Bernard Madoff scandal, fund operators faced pressure from investors to employ outside administrators.

The newsletter’s Manager Database contains the names of 243 fund administrators, most of which service just one or two hedge funds. Under the Dodd-Frank Act, fund managers with more than $150 million of gross assets are required to annually disclose details of their operations, including the names of service providers, via Form ADV filings.

Two new names appear among the 10 largest fund administrators this year: Butterfield Fulcrum at No. 9, with $92.7 billion under administration (a 2.4% share) and Wells Fargo at No. 10, with $83.2 billion (a 2.1% share). Wells’ assets under administration jumped 418% thanks to its acquisition of LaCrosse Global Fund Services from Cargill.

The expectation is that banks and a handful of the biggest independent firms will continue to gobble up small and mid-size fund administrators. “We think fewer and fewer firms have the bandwidth to make the significant investments required to go forward and remain competitive, so it’s likely there will be more firms going up for sale,” said J. Scott Carpenter, senior vice president of client relations at State Street Alternative Investment Solutions, the fund-administration arm of the asset-management giant.

The one exception may be Citco. Since its founding in 1939 as Curacao International Trust Co., the firm has eschewed acquisitions in favor of organic growth.

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