Deutsche Bank AG's acquisition of a California hedge fund administration business was its opening salvo in its plan to become a top-five player in the business, an executive with the banking company says.
Buying HedgeWorks LLC, of Carlsbad, brought Deutsche Bank more than $10 billion of assets under administration drawn from more than 100 hedge fund clients.
F. Jim Della Sala, Deutsche Bank's head of structured finance services for the global transaction banking unit's trust and securities services business, said his company has its work cut out to catch the industry's leaders, including State Street Corp., Citigroup Inc., and HSBC PLC.
"We are starting behind," he said. "It is a little late in game."
Nonetheless, Deutsche Bank aims to become a leading independent hedge fund administrator, he said. "We didn't go into it looking for a niche business."
But it does not plan to make a habit of acquiring hedge fund administrators.
"I don't think we are going to become a serial buyer," he said. "If something came up that was a good deal and fit into what our company is doing, we'd certainly look at it."
Deutsche Bank has long provided administration for alternative asset management products and services, such as private equity and real estate, from offices in the Cayman Islands, Delaware, the Channel Islands, Ireland, Luxembourg, and Mauritius. It is among the leaders in the lucrative business of prime brokerage. In that business it provides trading, lending, and other services to hedge funds.
Isabel Schauerte, an analyst with the Boston research firm Celent LLC, part of Marsh & McLennan Cos.' Oliver Wyman Group, said its expansion into hedge fund administration sets Deutsche Bank up in a "relatively low-margin" but "comparatively 'sticky' " business.
By providing both administration and prime brokerage services, Deutsche Bank can "increase the dependency of their hedge fund clients," she said.
Mr. Della Sala said Deutsche Bank believes the global hedge fund industry will continue to expand at a healthy clip. Estimates of 10%-20%-a-year growth for hedge fund assets seem reasonable, he said.
Ms. Schauerte said the $3 trillion hedge fund industry is still attracting new money, though not as rapidly as it once did. Excluding performance gains, she said, the industry grew 16.95% in 2007, compared with 26.81% in 2006.
The hedge fund industry has acquitted itself well during the credit crisis, and investor consensus "may come out as even more bullish on hedge funds than it was eight months ago," Mr. Della Sala said.
Deutsche Bank is not alone in opening its wallet to gain share in the hedge fund business.
In the last three years companies including Northern Trust Corp., Bank of New York Mellon Corp., and JPMorgan Chase & Co. have used acquisitions to expand and develop their hedge fund administration businesses.
In HedgeWorks, which has offices in Carlsbad, Boston, and the Cayman Islands, Deutsche Bank acquired a specialist in long-short equity funds as well as funds of funds. Long-short funds use a strategy that involves a combination of purchases and short sales.
"Snapping up an administrator which focuses on long-short equity funds is a foot in the door to servicing one of the fastest-growing hedge fund segments," Ms. Schauerte said.
Over the past decade, assets managed by long-short equity hedge funds have grown more than 20% a year, she said. Such funds recently displaced global macro funds, which invest opportunistically in all markets, to claim the largest share of industry assets, she said.
Independent hedge fund administration is a sought-after commodity because of the pressure for unbiased reporting that funds face from pension funds, endowments, and other institutional clients.
Hedge fund administration has been consolidating, in part because the independent firms cannot keep up with the technology upgrades, Ms. Schauerte said. Those upgrades allow for improvements in areas such as the frequency and accuracy of net asset value reporting.
"Some of the independent niche players lack the scale to stay competitive," she said.
HedgeWorks, which Deutsche Bank bought on Jan. 31, provides investor services, fund accounting, net asset value calculation, and customized Web reporting to hedge fund managers and investors. Deutsche Bank did not disclose the acquisition price.
