Hooking on to hedge funds

Citi is looking to take full advantage of the mass expansion in private clients’ allocations to hedge funds. Not only has it just purchased Bisys to add to its reach, but it is also actively seeking to expand its Luxembourg client list. To this end, it has just announced its first deal there. Appointed by Nexum, a Luxembourg domiciled hedge fund manager with assets of ?70m, Citi will now act as fund administrator, transfer agent, and custodian plus provide prime brokerage services and compliance monitoring to Nexum. But how does the servicing of hedge funds differ to that of long-only, and how has Citi moved so far to be able to attract both kinds of investment? Fergus Healy, director of alternative fund services at Citi says that there has long been the recognition, within the company, that eventually the two worlds would see a degree of convergence. “Citi’s strategy has been to build on the existing long-only platform to create a platform that has various specific bolt-ons but that can also be used across the board of financial instruments,” he says. For example, the group started looking at hedge funds in 2003 and the Multifunds platform that calculated net asset values was initially bolstered with Paxus, a third-party software add on that gave the ability to calculate and equalise performance fees. “The biggest difference in servicing hedge funds is making sure that we have the capacity to calculate the performance fee and also being able to do performance fee equalization,” says Mr Healy. “The other issue is that obviously hedge funds tend to be more complex in terms of the instruments used and the strategies traded. On the other hand the investors in hedge funds tend to be smaller in number and invest directly so there is less complication that way.” But now that convergence is becoming widely accepted as a fact, how has the IT strategy worked? Mr Healy thinks fund managers looking at alternative and plain vanilla strategies benefit from having some consistency in the way that the custody and administration is carried out. “A clear example of this is the current trend towards 130/30 funds where the structure of the fund remains essentially long-only but the manager is allowed to leverage up to 30 per cent or conversely go short by up to 30 per cent,” he says. Keeping on top “From a service provider perspective it’s always necessary to keep on top of issues connected with the fund manager; like whether he has the experience and ability to leverage and go short and that the processes are in place in house to allow for it.” But having built a solid platform Citigroup is now facing the new challenge of how to successfully combine the best aspects of its own platform and that of the recently acquired Bisys. The acquisition of top five hedge fund specialist Bisys, in May this year, propels Citigroup into second place in Europe for hedge funds servicing, according to Mr Healy. Bisys’s assets under administration for alternatives amounted to $325bn (e239bn), now added to Citi’s own $40bn figure. Clearly the ramifications of the relatively recent acquisition have not yet been fully identified; the acquisition has not yet been closed, but Mr Healy is keen to point out that the firm is now set to become a leader in this field. The acquisition of Bisys was, he says, a move by Citi to grow the business. “We have the global reach and the brand and Bisys has a good client list with a broad diversification of strategies so it made clear sense for both parties to come together to grow the business,” he says. “It’s a big leap forward from us having reached a certain critical mass to now looking to become a market leader,” he says. “And clearly it’s going to take some time to have a look at both sets of systems and work out the strengths of both and how we can merge those strong points and discard any parts that have now become outdated.” The intention then is to build best of breed for every type of functionality. This, says Mr Healy, cannot be done on a single system. Indeed at the moment the end products’ ideal functionalities are on a 20-page spreadsheet but, as he acknowledges, in a world where things move constantly the real solution needs to be a good basic software systems that you can then plug new functionalities into as and when required without it becoming one of those much talked about patchwork legacy systems. Can a perfect system ever exist given the constant state of flux? No, thinks Mr Healy. “Every player in the market faces the same challenges at the same time and has to adapt to say local environments such as the German tax system or a new product such as the 130/30 funds,” he says.

Healy: we have a global reach and brand