After adding more than 50 hedge funds as administration and operations customers last year, Northern Trust Corp. anticipates healthy growth for that business this year, but it will have a tough time cracking the upper echelon of administrators.
From September through December the Chicago company's global hedge fund assets under administration increased 13%, to $26 billion, said Rick Wills, a senior vice president and the head of its global fund services business in North America. That increase included more than $1 billion of assets for funds serviced from Northern Trust's location in Chicago.
This year assets should grow between 30% and 50%, Mr. Wills said. "We're seeing demand that is very high and is continuing at a rapid clip."
Northern Trust's hedge fund administration business has 55 clients and 180 funds. The business includes fund accounting and transfer agency services.
The company's share of the hedge fund servicing market is small. Mr. Wills would not quantify it, but according to Celent LLC of Boston, as of April the top 20 providers had a combined share of 89%, and Northern Trust was not one of them.
But Mr. Wills said it anticipates continuing demand as the number of hedge funds it administers grows and as his company increasingly seeks to administer independent funds.
A decade ago hedge funds tended to handle their own administration, including pricing, he said. "That's continuing to shift. Institutional investors want to see the same approach around the fund administration business as they see around the mutual fund business and everything else."
Brad Bailey, a senior analyst at the Boston research firm Aite Group LLC, said hedge funds want independent administration because shareholders are increasingly seeking neutral pricing valuations on hard-to-value fund assets, such as credit defaults or interest rate swaps.
Firms that provide prime brokerage services to hedge funds have grabbed a large chunk of the administration market as well, but many of these firms are being forced to launch independent administration units, he said.
Another factor fueling new business for firms like Northern Trust is the tight labor market for hedge-fund middle- and back-office experts, Mr. Bailey said.
The dearth of employees is pinching all but the biggest funds, and is a factor in Northern Trust's seeking outside administrators, he said.
Mr. Wills said Northern Trust does not plan to compete with bigger rivals through lower costs. "Price is not a place where we fall all over ourselves to try to bring differentiation to our offering."
Service and execution are the critical factors, he said — consistently getting things like net asset values and client reports right and delivered on time is the best way to set one's self apart.
According to Mr. Bailey, many of the custodial banks like Northern Trust are relative newcomers to the hedge fund administration game. "Several years ago the trust-type and custody-type banks kind of ignored the hedge fund space."
That changed after the banks saw the explosive growth of fund assets, he said. Assets in the investment vehicles stood at $1.43 trillion at the end of last year, according to Hedge Fund Research Inc.
Northern Trust expanded its hedge fund servicing and other capabilities in 2005, when it bought Baring Asset Management's financial services group for about $480 million.
Also in 2005, Mellon Financial Corp. bought Derivatives Portfolio Management LLC, a Somerset, N.J., hedge fund administrator. In March, JPMorgan Chase & Co. bought the middle- and back-office operations of Paloma Partners Management Co., of Greenwich, Conn., which was combined with JPMorgan Chase's hedge fund administration unit.
"Certainly in the last couple years they've decided they want a bigger part" of the hedge fund business, Mr. Bailey said.
