State Street Corp. has agreed to buy a Dublin alternative investments firm, making what it feels is the final entry in a menu of investment products and services that it can offer banks and financial service providers to help create custody business for itself.
State Street said last Tuesday that it plans to buy International Fund Services, which supplies alternative investment services to more than 100 asset management firms and private equity fund managers and has 350 hedge funds worldwide. Terms of the deal, which is expected to close in the third quarter, were not disclosed.
The purchase would be State Street's second in the hedge fund business and the first for its global custody business. In June 2001, State Street Global Advisors bought the assets of RXR Group Inc., a quantitative asset management company with $335 million of assets under management in proprietary programs. This enabled it to start Ssaris Advisors LLC, an alternative-investment advisory unit that sells products to State Street's own institutional and private clients.
Ronald Logue, the president and chief operating officer of the parent, State Street Corp., said that buying International Fund Services would be State Street's entry into hedge fund custodianship.
The deal would let State Street, which has $6.3 trillion of assets under custody, give bank and financial services customers access to 350 hedge funds that they can then peddle to their customers. By contract, the assets thus acquired by State Street's institutional customers would then go into the Boston banking company's custody.
Mr. Logue said at an investors conference in May that it was clear that financial services companies want to offer their customers access to hedge fund and other alternative investment vehicles.
"Our customers want us to service not just regular retail mutual funds," he said. "They want a full breadth of products and services. They want a full fleet of products."
In June, State Street bought the New York wealth manager J&W Seligman & Co. Inc. in order to add separately managed accounts to its product menu.
State Street built its reputation as a custodian by offering mutual funds, Mr. Logue said, but in order to serve affluent and institutional customers, it is crucial to offer a complete suite of products.
"This is just part of the services that wealthy individuals are looking for," he said. "Hedge funds and alternative investments, coupled with high-net-worth service and managed account wraps, make us a full-service player."
Burton Greenwald, a Philadelphia investment products analyst, said that State Street may not be the first to enter the hedge fund arena but stands to have the most complete package because it would be able to offer custodial services on 350 hedge funds in addition to its other alternative investment products.
Mr. Greenwald said the company's lone remaining hurdle is integration.
"State Street has to find a way to incorporate these new products and services into what customers are already getting," he said. "Offering more is excellent. But financial services firms have to find a way to bring these to their customers without making them just an addendum."
Mr. Logue said that, with hedge funds becoming more and more mainstream, incorporating them into a portfolio should not be too difficult.
"We are seeing strong interest right now not just in hedge funds but in alternative investments across the board. Investors are seeking absolute returns. Alternative investments have a history of strong absolute returns, and that is fueling their popularity."
