DPM tackles the problem of pricing

“We have seen a tremendous surge in interest for additional indices tracking various segments of the hedge fund universe,” says Paul Aranson, executive managing director at S&P.

But one side that is often left out from any debate about this fashionable asset class is the back office. While there is nothing new about outsourcing hedge fund administration, the highly specialised nature of the tasks involved is leading to the rise of some independent, non-aligned players in the market.

Early player

A good example is Derivatives Portfolio Management (DPM), which has seen spectacular growth in assets under administration from $10bn to $18bn during the last 12 months.

“We have a very good knowledge of the hedge fund industry because we were on the scene at a very early stage,” says Alan Tooker, managing director of DPM in Europe.

Mr Tooker’s office is conveniently based in London’s plush Mayfair region, home to over 100 top hedge managers including International Asset Management, RAB Capital, Ferox and London Diversified.

DPM, created 10 years ago, now employs over 150 people worldwide and directly competes with the market’s major fund administrators such as Citco, Bisys and Fortis.

DPM’s global headquarters are in Somerset, New Jersey, with subsidiaries in London, the Cayman Islands and The Bahamas.

Complex strategies

Like some competitors, it cites its experience in servicing proprietary traders with administrative back-up related to executing and valuing complex trading strategies. DPM’s knowledge of the alternative investment universe, claims Mr Tooker, has allowed his back office team to develop systems to gather, reconcile and value trade data of any financial instrument and provide clients with customised reports by 9pm on trade day. And there seems to have been enough of the administration pie to share out among forward-thinking players.

But an internal pricing system is currently under development. And it is this last move which DPM believes will give it true market advantage, due to increased concern among investors about accuracy and transparency of pricing.

“Pricing is becoming a real issue and we are spending a significant amount of money in developing our own internal model,” says Mr Tooker. At the moment, three different reference points are used.

“If they come close together we know we are OK, but it they don’t we have to find out why and come up with a solution. We have a pricing committee that is responsible for that,” he adds.

“Once we have developed our own pricing model, we will be able to provide a stronger service, even for the most unusual investment products.”

He believes that substantial expenditure on new systems is necessary in order to remain at the forefront of the hedge fund industry and is an essential ingredient for growth of the business. The huge cost behind establishing new platforms also prevents new players, who lack the necessary resources, from breaking into this market.

“The entry cost to this business is very high, because if you don’t have the right systems, you are in trouble,” he says.

Mr Tooker says that having the right technology not only opens the door to the hedge funds world as whole, but can also give you access to the most complex products present in the market, including fund of funds vehicles that require more sophisticated administration support.

“There is a big hedge fund community in Europe that comes in many different types and sizes. You have the single strategy managers and the large institutions, and all sorts of people in between. We are happy to work with different clients, from the small start-ups to the large institutions.”

However Mr Tooker highlights DPM’s speciality in dealing with the most complex products.

“A lot of fund administrators, ourselves included, are good at single manager products, but not everyone can provide full administration services for the more complex vehicles,” he says.

“In relative terms, the administration of single manager products is much cleaner and easier, but after 20 years’ experience in the sector, we are very well placed to handle the complex products as well as the simpler ones.”

At work on index

A good example of a more complex hedge fund structure is the new

FTSEhx Fund SPC, which chose DPM as its administrator. The constituents of the fund, managed by MSS Capital, will form the basis for the new FTSE Hedge index, about to be launched.

The new fund aims to address and alleviate investors’ concerns over the lack of liquidity, risk control and capacity within the hedge fund industry.

If technology is a crucial element for fund administrators, having the right business partners can also open new horizons. In 2002, DPM signed a strategic alliance with Daiwa Securities Trust and Banking Europe (DSTBE), to provide administrative services to their Dublin-based clients.

“Dublin has been able to capture quite a lot of the hedge fund activity in Europe in two different ways,” explains Mr Tooker. “On the one hand, it is one of the most important centres for fund administration and it is also offering a very good service for hedge funds listed in the Irish Stock Exchange. Also Dublin is in the European time zone and many clients like to have everything in their time zone.”

Useful partnerships

Other partnerships include the New York-based hedge fund aggregation platform S3 Asset Management and hedge fund advisory group Tennyson Capital, based in London.

In December last year, DPM also announced a strategic alliance with Putman Lovell NBF Securities, a subsidiary of Canada’s National Bank Financial.

With this amount of activity, Mr Tooker is not surprisingly positive with the way the industry is developing: “The hedge fund industry in Europe is moving in the right direction. Until very recently it was extraordinarily difficult to distribute hedge funds in Europe, but this has changed after a lot of lobbying from people in the industry and a better understanding about hedge funds coming from the regulators.”

Investors, believes Mr Tooker, can now see that hedge funds can preserve and generate capital. “They can be used as protection in a way people couldn’t really understand in the past. Because of this, more and more managers want to get established in the hedge fund universe. And we need that.”

Rapid growth will go hand in hand with a continuously evolving industry, believes Mr Tooker.

And while independence is not the key selection criterion for clients searching for an administrator, fast response to changing product ranges associated with this status is clearly paramount.

‘The entry cost to this business is very high, because if you don’t have the right systems, you are in trouble’
Alan Tooker, DPM