Hedge funds are demanding more service and lower costs, and that is translating into greater turnover among service providers.
That’s the conclusion of a recent survey by Preqin that found that 25% of all hedge fund managers surveyed at year-end 2016 changed at least one service provider over the preceding 12 months.
The main reasons for the changes: cost and quality of service.
Of the hedge funds surveyed, 75% changed one service provider, 18% changed two, while 7% changed three or more service providers during the year. Hedge funds that changed administrators, custodians, auditors, and law firms said they made the change because of costs, and those that changed prime brokers and marketers mostly did so because they did not like the service they received.
Among the services provided to hedge funds (fund administrators, fund custodians, prime brokers, fund auditors, law firms, and fund marketers), prime brokers were the hardest hit with a 39% turnover. The main reasons cited were quality of service issues, growth in assets under management, and prime brokers asking that the hedge fund find another provider. The most used prime broker was Goldman Sachs.
The second-largest switch in service providers occurred in fund administrators (31%), followed by auditors (28%), fund marketers (22%), and law firms (20%.)
According to Amy Bensted, head of Preqin hedge fund research, “in order to retain hedge fund clients and win new business, service providers need to address concerns over cost and quality of service, particularly as investor scrutiny over fees and performance continues to grow. These firms will need to maintain a careful balance by improving their service offering while still reducing costs.”
Another key reason is that the industry is changing. More new hedge funds are being launched and the regulatory environment has accelerated consolidation among service providers, particularly among hedge fund administrators. For instance, SS&C GlobeOpbought the hedge fund administration businesses from Citigroup and Wells Fargo in 2016. This made SS&C Globe Op the largest provider of hedge fund services, as measured by both total number of funds serviced (1,512) and new business acquired. The other largest fund administrators ranked by Preqin are Citco Fund Services (1,304 funds serviced), State Street (International Fund Services with 1,083 funds), BNY Mellon (553 funds), Morgan Stanley Fund Services (495 funds), and Northern Trust Fund Administration (452 funds.)