June 2008 Ireland Hedge Fund Services 2008 - … Hedge Fund Services 2008 ... Merchant Banking. ......

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Funds servicing sector set to weather the storm Anticipating the needs of funds and investors Service providers continue expansion outside Dublin Ireland Hedge Fund Services 2008 June 2008

Transcript of June 2008 Ireland Hedge Fund Services 2008 - … Hedge Fund Services 2008 ... Merchant Banking. ......

Funds servicingsector set toweather the storm

Anticipating theneeds of fundsand investors

Service providerscontinue expansionoutside Dublin

Ireland Hedge FundServices 2008

June 2008

IRELAND Hedgeweek Special Report Jun 2008 www.hedgeweek.com | 2

CONTENTS

In this issue…03 Robust funds servicing sector set toweather the stormBy Romil Timbadia

05 Anticipating and surpassing client needsBy Philip Craig, Fortis Prime Fund Solutions

08 The automatic revolution is upon usBy Don McClean, UBS Global Asset Management

10 Challenges for hedge funds seekinginstitutional assetsBy John Alshefski, SEI

13 Global providers offer unlimitedopportunitiesGary Enos, State Street

14 Service providers continue expansionoutside DublinBy Romil Timbadia

16 Across the board assistanceDonnacha O’Connor, Dillon Eustace

19 No complacency will make future forfunds industry brightRonan Nolan, Deloitte Ireland

22 Banking plus adminBy David Aldrich, The Bank of New York Mellon

Publisher/Editor-in-Chief: Sunil Gopalan, [email protected]

Marketing Director: Oliver Bradley, [email protected]

Sales Manager: Simon Broch, [email protected]

Graphic Design (Special Reports): Siobhan Brownlow at RSB Design

Photographs: Courtesy of Fáilte Ireland

Published by: Hedgemedia Limited, 18 Hanover Square, London W1S 1HX

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© Copyright 2008 Hedgemedia Limited. All rights reserved. No part of this

publication may be reproduced, stored in a retrieval system, or transmitted, in any

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otherwise, without the prior permission of the publisher.

Publisher

The credit crunch tsunami has touched allsectors within the financial services industry,with each being affected in one way or theother. Even Ireland has felt the impact, albeitto a much lesser extent than the US or theUK. While there is no doubt that the IFSC(International Financial Services Centre) andthe Irish funds industry have performedspectacularly in the past decade, many arerealising that a new age that has emergedwithin the financial services industry sincethe credit crunch last year.

However Ireland’s funds industry, whichhas been the envy of many competingjurisdictions, has not been impacted as

much. Gary Palmer, CEO of the Irish FundsIndustry Association, says, “Since the creditcrunch and the liquidity issues of last year,no sector within the financial servicesindustry has been immune from its effects.The funds industry, however, has beenimpacted less, for one reason – and that is– unlike investment banks, the affectedassets are not held on the industrycompanies’ balance sheet.”

Senior fund administration executivesagree that there will be a need for Ireland’sfinancial services sectors, including thefunds industry, to keep their eyes on theevolution into the future and look more

Robust funds servicingsector set to weather

the stormBy Romil Timbadia

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O V E R V I E W

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Getting you there.

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In today’s ever competitive and fast pacedenvironment, service providers need to faceup to the challenge of rising operationalstandards that have been triggered by theinflow of institutional investors into theindustry. To survive in the alternativeinvestment fund servicing environment,service providers must keep pace with thechanging needs of clients and their clients’investors. Providing a quality service in atimely and accurate manner and monitoringkey performance indicators can help toensure the delivery of operational excellence.Indeed, service providers need to be aware ofmarket trends and must anticipate the impactof such trends on their businesses. Ultimately,it is the investors that dictate these trends.

Choosing the right service providerenables the client to focus on its front officeinvestment management activities rather thanfocussing on operational and back officeadministrative issues. The service providermust play the essential role of providingsupport to the fund managers to be able toclaim a value-added role. Investmentmanagers will typically prefer to outsource asmuch of the operational burden as possible,so as to benefit from economies of scale thatcan only be achieved through large operatinginfrastructures. Global fund service providerssuch as Fortis are able to invest in state-of-the-art systems and architectures that canlead to greater automation of processes.Global service providers are also able to takeadvantage of multi-region offices to providecomplete 24 hour coverage. The rightsystems are essential to gain efficiencies,which ultimately result in lower costs.

Fortis views client relationships aspartnerships and can therefore add value byoffering its clients access to a greater depthof professional talent and a broad range ofservices. The firm has focused on creating a

highly efficient model which is supported byexperienced and dedicated staff, best inclass systems, client support, relationshipmanagement and a host of other supportunits to deliver timely, accurate and qualityreporting to clients. Clients requiring morefrequent reporting are compelling serviceproviders to process information on a dailybasis. The systems used should have theflexibility to deliver added value reporting aswell as the ability to service clients frommultiple locations, if required.

For global service providers, systems areparamount to implementing a truly globalplatform where all client servicing processesand procedures are uniform across theglobe. Creating global uniformity provides theglobal service provider with a strongerfoundation in which to service clients in thelong run. Those who will survive asalternative providers are those who canprovide operational excellence, cananticipate and deliver on clients’ needs andfinally those who can develop and adapt tomarket changes as the business grows.

In addition to meeting the client needsfrom an operational perspective, serviceproviders will typically appoint relationshipmanagers to understand and anticipate futuredemands. The relationship manager shouldknow the client in terms of its funds andproducts, strategy, organisation, including keypersonnel and structure. Knowing the client isfundamental to assisting in the growth of theclient firm, which in turn should lead togrowth in the service provider’s business.Managing the client in an open andtrustworthy manner is key to a successfulrelationship. The client should alsounderstand the service provider’sorganisation so that both parties can mutuallybenefit from each other’s business needs,knowledge and capabilities. ■

F O R T I S

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Anticipating andsurpassing client needs

By Philip Craig

Philip Craig is RegionalDirector – Europe, FortisPrime Fund Solutions

objectively on what may develop out of thecurrent circumstances. They say thatadditional efforts by government, regulatorsand industry can help Ireland’s fundsindustry grow even further amidst financialuncertainty and increased competition.

The Irish Financial Services RegulatoryAuthority (the Financial Regulator), renownedfor its pragmatic approach, has beenpreparing for this new shift in the industry.The Financial Regulator has alreadyachieved a stellar reputation globally. In mostcases this has been achieved by maintainingits principles-based system of regulationwhich has been shown to be both robustand responsive over the last few months.

In a recent event, CEO Patrick Nearyemphasised the importance of aninternational collaboration to form a strategypartly by the lessons learnt from the pastfew months. He said, “Domestic legislationcannot, in itself, provide responses to themarket issues that have arisen; these arebest considered at an international level andthere are currently a number of studiesunderway… lessons will then need to beaddressed on an international level by themarket participants, central banks andregulators.”

The funds industry is also insulated byadditional regulation that it has. For example,the fund companies as well as the productsare regulated, whereas in other industries,the companies are regulated but theirproducts are not.

In an overall context, the FinancialRegulator is well-regarded by the industry.Don McClean, head of fund services, Irelandat UBS Global Asset Management, says,“Ireland, from a regulatory point of view, is ingood shape. Our regulator encouragessuccessful business activity in a strictlyregulated environment – it’s an attractiveenvironment for both investors and serviceproviders.”

Ronan Nolan, a partner at Deloitte Ireland,adds that the regulator clearly recognises theimperative to combine a reputation for firstclass regulation with competitiveness andresponsiveness to innovation.

The regulator continues to be supportiveof the funds industry and its development inIreland, whilst also maintaining the integrityof Ireland as a service location. Andrew

Dillon, Managing Director at BaronsmeadInsurance Brokers Ireland, says, “It is aninvaluable partnership and creates anenvironment that is flexible in meeting theneeds of fund promoters, whilst alsoprotecting the interests of investors.”

All this is positive news for a burgeoningfunds administration industry. According tostatistics published by the Irish FundsIndustry Association, the aggregate assets ofIrish registered collective investment schemesgrew from EUR361.8bn in December 2003 toEUR806bn by December 2007. The number ofnon-Irish registered funds administered inIreland grew from 1,654 in June 2003 to 2,752in December 2007, while alternativeinvestment funds administered in Irelandgrew in terms of assets under administrationfrom USD199bn in March 2003 to anestimated USD1.01trn by December last year.

Ireland’s fund administration success hasbeen based on innovation, good legal andregulatory framework, excellent businessenvironment and the ability to provideexperienced staff that can facilitate theprocessing of sophisticated products. And

O V E R V I E W

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© UBS 2008. All rights reserved.

Successful HedgeFund Administration?

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Find out more by visiting www.ubs.com/fundservices

or e-mail us at [email protected]

Two key visible and ongoing trends in theservicing and administration of funds is theconvergence of traditional and alternativeinvestment managers on each other’s space,and the need for increased automation andprocessing.

One result of the convergence is thebridging of the gap that was earlier quiteevident across the fund spectrum. From thetraditional manager’s point of view, we areseeing many investing into alternativeproducts, using shorting techniques andsystematic derivatives. From the hedge fundsperspective, we are seeing the need fromclients for more frequent dealing andreporting, taking on some of thecharacteristics of traditional funds.

For a service provider, to keep up withclients’ requirements and respond to theseongoing trends, there is a need for increasedautomation in order to provide informationand pricing in a daily rather than a weekly ormonthly environment.

Trade input, valuation and reconciliationneeds to be optimised into a time zone thatworks to the service providers’ advantage inorder to meet clients’ needs. We are alreadyseeing the direction in which the industry ismoving in order to create capacity andscalability. This demands technology andinvestment in state of the art systems androbust infrastructure, centralising systemsand procedures to enable round-the-clockprocessing.

For single manager funds the triangularreconciliation process between theadministrator’s systems, populated bymanager trade instructions andindependently valued, and prime brokers’records, must become a straight throughprocess. Currently administrators automatethis process on a client-by-client or primebroker-by-prime broker basis. Although this

provides an automated solution with clienttailoring capabilities, in order to determinerequired capacity and scalability, a standardindustry-wide messaging system providingstraight through processing similar to thetraditional fund administration business isrequired. The first step in achieving this is forthe industry to establish standard uniqueidentifiers (security masters) for allinvestment instruments.

One current initiative to address thechallenge of a largely paper-based fund ofhedge funds (FoHF) system is collaborationbetween service providers in various hedgefund jurisdictions who are working towardsan automated solution for FoHFs using theSWIFT messaging system. Once in place theSWIFT initiative will allow the straight throughprocessing of fund of fund trading frominvestment manager to custodian to transferagent. The SWIFT messaging platform willalso facilitate a more automated approach topricing, valuation and settlement of fund offund trades.

Within the funds world, processes andtrade information need to be transferredautomatically with flexible and timelysolutions being the order of the day. At UBS,we are working towards a completelyautomated future.

Putting it simply, automation reduceshours, helps provide accurate and timelyinformation and increases scalability. In factit is necessary to sustain business growthin the future. Generally, we follow acontinuous circle of automation. Newchallenges tend to be manual but then theybecome automated. Fund automation is onthe advance. To remain competitive, thefund industry must embrace it and strive forthe scalability, capacity, risk reduction andcost-saving benefits derived fromautomation. ■

U B S

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The automaticrevolution is upon us

By Don McClean

Don McClean is Head of FundServices, Ireland at UBSGlobal Asset Management

two of the main factors that fuel this industryare first mover advantage, and quickerregulation and approval of products. For thelatter, Ireland took the initiative in 2007 whereit introduced a new notification-only processfor the approval of Qualifying Investor Funds(QIFs) under which applications forauthorisation lodged with the regulatorbefore 3 p.m. in the afternoon would beprocessed for 9 a.m. the next morning. Thisprocedure was designed to remove whatwas seen as an important obstacle to theuse of Irish alternative funds. Moreimportantly, it highlighted Ireland’s flexibilityand pragmatism in the funds area.

First mover advantage has always beenvital but, with the changing times, it hasproved to be even more crucial. Keeping upwith the pace in the funds industry, indeveloping new products and services, inintensifying research and education, and inadapting to new economic and legal realitiesare challenges that all fund jurisdictions willface. As Gary Palmer says: “If you are a fastfollower, all you do at best is come second.”

One of the biggest trends in the fundsindustry is consolidation. A lot ofconsolidation has been taking place – withbigger entities buying out small and boutiquefunds, or with two entities merging to form abigger group. Palmer notes “Whileconsolidation in the funds industry has beenanticipated for some years, the last 18months has witnessed quite considerableconsolidation activity. While, in the past,much of the consolidation was to gainexpertise in specific areas, recently theconsolidation activity has also been toincrease scale.”

By consolidating and becoming larger,these new groups can diversify risks andhave a solid and bankable support system.And many funds are also seeking toconsolidate part of their services and assetsto larger institutions. Dillon explains, “Somehedge funds have looked to transfer assetsto the big global custodians in the wake ofthe recent market turmoil and the writedowns by investment banks/prime brokers.The global custodians would be seen as asafe haven and it also reduces thecounterparty exposure that the funds face.”

Consolidation in the hedge fundadministration sector is likely to continue but

the sector is also likely to see a continuingstream of new entrants to the market. DavidAldrich, Managing Director of The Bank ofNew York Mellon, says, “For every firm thathas been taken over by a global custodian,several new boutiques have been created.One of the attractions for creating new firmshas been the very attractive valuations thatrecent takeover targets have achieved,largely due to the need for the globalcustodians to acquire alternatives capability.That trend has largely played itself out, andthe focus is switching to consolidation ofmedium to large firms into single businesseswith greater critical mass. The top end ofthe hedge fund service provider market isdominated by firms with at least USD 200billion in alternative assets underadministration globally, which may beconsidered sufficient to justify the R&D andtechnology investment necessary to keeppace with the speed of innovation of the“premier league” of hedge fund managers.”

Dillon adds, “There are currently a numberof firms entering the fund administrationmarket with many being founded by formerexecutives of firms that were swallowed upin the consolidation of recent years. Some ofthese have made promising starts and arefilling an important gap in the market. This isa very positive development for the industryin Ireland and should ensure that servicestandards remain high.”

Further consolidation is bound to come asglobal players seek to increase their capacityand capabilities, and the smaller players look

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Until recently, being able to tout impressiveperformance was basically all a hedge fundneeded to thrive. No longer is that a readyformula for success. For one thing, deliveringstellar returns is easier said than done in thismarket. Hedge funds also face burgeoningranks of direct competitors plus a growingchallenge from a range of traditional andprivate equity managers.

So far most managers appear to beweathering the current environment, but forthe first time many will have their investmentstrategies, management capabilities,operations and leadership team put to thetest. Given that many corporate pensionplans, foundations and endowments arecontinuing to assess their comfort level withhedge fund investing, many institutionalinvestors will be scrutinizing their alternativemanager resilience in these tough times.

To help hedge fund managers understandthe competitive requirements of the institutionallandscape, SEI’s Investment Manager Servicesdivision, which provides fund outsourcingservices to alternative investment managers,partnered with the research firm Infovest21 toanalyse industry trends and survey more than100 institutional investors. Based on SEI’sanalysis, hedge fund managers can expectinstitutional clients to increase pressure on arange of issues, demanding:● A strong management team with a full

range of skill sets and reasonablecontinuity. From the institutionalperspective, having one or two investmentsuperstars is no substitute for a well-staffed organisation, be it an up-and-coming boutique or a long-establishedfund with billions under management.

● Solid infrastructure incorporating third-party

administration and valuation. In fact, theinstitutions in the SEI survey rankedinfrastructure as their number-one criterionin manager selection, reasoning that “bettermanaged funds produce better returns”.

● A verifiable track record for their currentpeople and products. Many institutionalinvestors say they would favour a fund witha well-documented, 3- to 5-year history ofconsistently good results over one with abriefer record of outstanding performance.

● A transparent investment strategy andprocess. More than 85% of institutionssurveyed said they would not invest in astrategy they did not understand. Whilefew wanted portfolio transparency at theposition level, more than half said theyseek it at the sector or industry level.

● Demonstrated adherence to the higheststandards for compliance and businesspractices. With a growing whole new bodyof regulations and “best practices”guidelines now emerging from workinggroups in the UK, Europe and the US, thebar is certain to be raised much higherthan in the past around these issues.

The pressures for hedge funds to voluntarilyadopt and help advance industry bestpractices can only be expected to intensifygoing forward, especially if managers cannotoffer outstanding performance. Right now,many hedge fund managers areunderstandably preoccupied with today’seconomic and market challenges as theysearch for new opportunities and novelvariations on formerly winning strategies. Butthey must not forget to update their competitivemindset at the same time. The industry mustrecognize that for institutional prospects andclients, performance is only the beginning. ■

S E I

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Challenges for hedgefunds seeking

institutional assetsBy John Alshefski

John Alshefski is Senior VicePresident, SEI

to survive. However, this does not spell theend of smaller boutique fund administrators,in fact, quite the contrary. Smaller boutiquefund administrators will always be importantin this dynamic industry where funds of alltypes and sizes need to be catered to. “Theexistence and development of smaller fundadministrators copper-fastens the need forthe broad range of company types in thissector,” Palmer sums up.

Another trend that is likely to be exercisedmore in the near future is that of valuation.The funds administration sector is nowoperating in a new era. As with every othersector the impact and implications of thechanging economic market conditions areobvious. While the funds servicing sectorhas been buoyant of late, many are alsonow paying close attention to the valuationof funds – one of the main jobs for a fundadministrator. And Dublin, a centre of fundadministration expertise, is likely to lead theway. Palmer says, “Challenges have arisenand the valuation activity of a fund hasbecome much more involved.”

Alternative Investment ManagementAssociation (AIMA) guidelines andInternational Organisation of SecuritiesCommissions (IOSCO) principles representefforts to create a valuation standard that allfunds should follow.

The funds servicing industry is verypositively disposed towards the newstandards and welcomes the developments.However, the industry needs to coalescearound a set of standards and focus ondelivering against these.

This is critical in the development of thehedge funds sector as good and fair valuation

standards are vital to encouraging investors toinvest in a fund. They form an essential partof the policies and procedures of a hedgefund looking to attract significant assets intoday’s markets. Clarity over valuations ofassets gives confidence to investors and isalso a requirement for new capital allocations.

In this new financial era, Ireland is wellplaced to continue to grow its funds industry.“Ireland has done a commendable job ofbalancing the needs of all the stakeholders inthe industry including investors, managers andservice providers. It has a strong advantageover a number of competing jurisdictions anda very healthy level of competition betweenservice providers,” says Dillon.

The key lies in avoiding complacency,attracting intellectual capital and keepingrising costs at bay. Unlike in 1987 [when theIFSC was formed], Ireland is now a high costenvironment and needs to upgrade andaccelerate investment in skills, training andeducation to support the higher productivityand value-added activities necessary tosustain and develop its funds servicingsector over the next 20 years.

The challenges of retaining talent andmanaging service provision in a rising costenvironment can be managed, but require anunrelenting focus. The IDA, for example, is inthe midst of an ongoing internal debateabout how to take the funds industry to thenext level. Plans to consolidate andmodernise Ireland’s overall financial serviceslegislative framework are expected to providea competitive edge.

In the context of a challenging globalfinancial services environment, it is importantthat players in Ireland’s funds servicingsector keep their eyes on evolution, ratherthan the confusion of the present. It is easyto get caught up in the turmoil and negativecommentary, rather than looking moreobjectively on what may develop out of thecurrent circumstances.

Palmer sums up, “There is an equalmeasure of optimism and concern [goingforward]. Optimism because the fundsindustry still has a wealth of unrealisedpotential. Concern because we are operatingin a very competitive global industry in achanging economic environment and willhave to work very hard to realise thispotential.” ■

O V E R V I E W

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AT STATE STREET, WEINSIST ON DOING THINGSIN A VERY SPECIFIC WAY.YOURS.

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administration company, to deliver a complete set of servicing

solutions for hedge funds and fund of hedge funds. Our

services include recordkeeping, fund accounting, valuation, risk

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the knowledge and commitment of the industry’s most

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For more information, contact Karen Egan at +353 1 707 5235,

[email protected], or visit www.statestreet.com.

INVESTMENT SERVICING INVESTMENT MANAGEMENT INVESTMENT RESEARCH AND TRADING

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A State Street CompanyA State Street Company

With the wave of global uncertainty refusingto depart anytime soon, many in the financialservices sector are restructuring andrethinking their strategies. While many focuson cutting costs and identifying new capital,one point that is key presently is thereliability, commitment to the business andsteadfastness that can be provided byexperienced partners and advisors.

From a funds’ perspective, it is essentialto note that larger service providers mighthave an edge over their smallercounterparts. Hedge fund administrators facetough technological challenges as theycompete to provide services in thisdemanding sector. As the hedge fundindustry grows more complex, having theright technology and expertise in place iscritical to a successful servicing relationship.Furthermore, size, accessibility and backingfrom an institution with a long-standinghistory of success can be advantageous interms of being better equipped to deal withoutside factors in an uncertain time.

Even within the hedge fund investmentsector, we are seeing a lot of consolidation –with bigger entities buying out small andboutique funds or with two entities mergingto form a bigger group. By consolidating andbecoming larger, these new groups candiversify risks and have a solid and bankablesupport system.

In today’s world, the real differentiators aretimeliness, accuracy and consistency. Whatis required from those providing fundservices is quality of service, which meansbeing able to contact and obtain acomprehensive answer from someone

empowered to change and fix things, as wellas execute these changes in the proper way.

As an example, State Street reinforced itscommitment to the hedge fund business andfocus on institutional investors when itacquired International Fund Services (IFS) in2002 and Investors Financial Services Corp.in 2007 (IFIN). These strategic acquisitionsadded to our existing strength internationally,especially in Ireland.

Established institutions provideopportunities to expand our clients’businesses globally and into high-marginservice opportunities. We can offer wideraccess to markets and more value-addedservices. In addition, clients can feel anadditional level of comfort knowing theirprovider is committed to the business andwill be there no matter what the marketconditions.

In Ireland, State Street is one of thelargest employers in the InternationalFinancial Services Centre (IFSC) in Dublinwith more than 25% of the total IFSCemployee population. As the largest fundadministration organisation in Ireland, StateStreet now employs more than 2,000 peopleacross all of Ireland.

Further consolidation is bound to come asglobal players seek to increase their capacityand capabilities, and the smaller players lookto survive. As hedge fund assets and theassociated transfer of information becomemore complex and as the regulatoryenvironment changes, funds and fundservice providers will need to keep up. Weare, after all, in one of the most dynamicindustries of the new world. ■

S TAT E S T R E E T

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Global providers offer unlimitedopportunities

Gary Enos

Gary Enos is executive vicepresident, State Street

Ireland has established itself as a leadinginvestment funds servicing jurisdiction. Thefunds servicing industry has grownphenomenally and is now the single largestemployer within Ireland’s internationalfinancial services sector. Many factors havecontributed to this, most importantly,regulatory and legal norms and skills. Theexistence of a highly developed fundservices industry in Ireland is mostly due tothe willingness on the part of the FinancialRegulator, the Irish Stock Exchange and theIrish Government to work with the industry to

adapt and develop regulation to meetinternational promoters’ needs.

In addition to the stronghold of thedomiciled business – the Ucits products –Ireland is recognised as one of the leadingadministration centres for hedge funds andfunds of hedge funds globally. Its success isderived from experts and professionals in thefield with an estimated 15,000 now workingacross the large number of fundadministration and custody/trustee servicesproviders, specialist legal, audit, tax andlisting firms, and consulting firms.

A D M I N I S T R AT I O N

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Service providerscontinue expansion

outside DublinBy Romil Timbadia

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In all iance with Arendt & MedernachIn all iance with Arendt & Medernach

DUBLIN CORK BOSTON TOKYODUBLIN CORK BOSTON TOKYO

Dillon Eustace focuses on providing advice and innovation in Dillon Eustace focuses on providing advice and innovation in

alternative investment products such as single and multi-strategy alternative investment products such as single and multi-strategy

hedge funds, private equity vehicles and real estate.hedge funds, private equity vehicles and real estate.

With one of the largest alternative investment teams in Ireland, With one of the largest alternative investment teams in Ireland,

with in-depth experience from all sectors of the industry, Dillon with in-depth experience from all sectors of the industry, Dillon

Eustace advises on all aspects of alternative investments Eustace advises on all aspects of alternative investments

including product design, launch, listing, tax and compliance for including product design, launch, listing, tax and compliance for

international and domestic managers, prime brokers and other international and domestic managers, prime brokers and other

service providers.service providers.

www.dilloneustace.ie

For more information, contact:For more information, contact:

David Dillon, Andrew Bates, Donnacha O'Connor, David Dillon, Andrew Bates, Donnacha O'Connor,

Etain deValera, Stephen Carty or Peter Stapleton at:Etain deValera, Stephen Carty or Peter Stapleton at:

33 Sir John Rogerson’s Quay, Dublin 2, Ireland.33 Sir John Rogerson’s Quay, Dublin 2, Ireland.

Tel:+353 1 667 0022, Fax:+353 1 667 0042,Tel:+353 1 667 0022, Fax:+353 1 667 0042,

e-mail: [email protected]: [email protected]

or Brian Dillon or Gregory Noone at:or Brian Dillon or Gregory Noone at:

Dillon Eustace, Tokyo.Dillon Eustace, Tokyo.

Tel: +813 5219 2042 Fax: +813 5219 2021Tel: +813 5219 2042 Fax: +813 5219 2021

e-mail: [email protected]: [email protected]

[email protected]@dilloneustace.ie

or Andrew Lawless at:or Andrew Lawless at:

Dillon Eustace, Boston.Dillon Eustace, Boston.

Tel: +1 617 217 2866 Fax: +1 617 217 2566Tel: +1 617 217 2866 Fax: +1 617 217 2566

e-mail: andrew.lawless @dilloneustace.iee-mail: andrew.lawless @dilloneustace.ie

PRIVATE

Dillon Eustace has one of the largest financialservices legal practices in Ireland. The assetmanagement and investment funds team hasa team of 35 lawyers and advisesinternational and domestic asset managers,banks, insurers, pension funds, supranationalorganisations, prime brokers and othercounterparties, fund administrators andcustodians, securities lending agents andothers in relation to all aspects of the assetmanagement and investment funds industries.

Our team represents the largest numberof Irish domiciled funds (Lipper Fitzrovia2007) as well as funds domiciled in Cayman,BVI, Jersey and other centres reflecting thefact that the asset management andinvestment funds practice has been, andremains, one of the firm’s core activities withpartners having been to the forefront of theIrish industry from its beginnings in the late1980s to the present day. Current industryparticipation includes Committee I,International Bar Association, AIMA, past andpresent membership of the Council of theIrish Funds Industry Association (IFIA).

Across all product types – from UCITS IIIto the full spectrum of alternative productssuch as hedge funds, fund of hedge funds(FoHF), real estate and private equity funds –the team advises on product design,authorisation and launch, prospectus andcontractual documentation negotiation,interaction with regulators and exchanges,funds listing and tax issues. This brings tobear in-depth knowledge and expertise,product innovation and a “can do” attitude,most recently evidenced with CCFs, newUCITS III asset classes, the first non-Italianhedge fund authorised for sale into Italy,negotiating significant changes to the custodyrules for Irish real estate funds and someunique hedge fund and FoHF products.

The derivatives team advises leadingdomestic and international banks,

bancassurers, dealers and asset managersin relation to documenting and structuringderivatives products, synthetic transactions,regulatory compliance, set-off opinions, stafftraining, improving existing documentationtemplates and content and advising on all ofthe industry standard master agreements.

Our expertise includes currency, credit,equity, fund and commodity derivatives,structured derivative products, collateralarrangements, netting and set offarrangements and opinions, advising a widerange of regulated companies in relation totheir use of derivatives and tax issuesrelating to derivatives.

We also have a highly thought of taxpractice which has as one of its primaryfocuses on international financial services, inparticular the asset management andinvestment funds industry. The tax groupadvises on all product types with considerableexperience in advising fund promoters on taxefficient structures to access double taxtreaties for fund products and for avoiding thecreation of a taxable presence. They are fullyversed in the Irish direct and indirect taxissues facing service providers who haveestablished operations in Ireland or wish to.

In addition the investment funds listingteam advises international and domesticasset managers and fund promoters on allaspects of listing Irish and non-Irish(principally Cayman, BVI, and Bermudan)funds on the Irish Stock Exchange (ISE).

Dillon Eustace handles large volumes ofinitial listings as well as advises clients oncontinuing obligations.

With relevant input from the firm’s otherpractice areas and through its offices inDublin, Cork, Boston and Tokyo andleveraging off its alliance with leadingLuxembourg law firm, Arendt & Medernach,Dillon Eustace continues to be at the forefrontof the financial services industry in Ireland. ■

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Across the boardassistance

Donnacha O’Connor

Donnacha O’Connor is Partnerat Dillon Eustace

Trends that are set to dominate this yearinclude a shift in product and serviceofferings, as funds accustom themselves tothe credit crunch, along with infrastructuraland technological developments that are fastseeing a lot of attraction, as speed andturnaround times gain priority amongmanagers and their investors. And last butnot least, a trend that has been spreadingover time is that many in the industry areexpanding their administration operationsinto the regional cities and towns with manyof the leading players now having significantoperations outside of Dublin.

Ireland’s funds servicing industry isdynamic, with products and servicesconstantly being adapted and transformed,and new ones always on the horizon tomeet the changing needs of promoters andinvestors. With the liquidity squeeze sincelast year, a lot of change has taken place –and a lot of change is also due to takeplace. Accordingly, the funds servicingindustry is ready to take its dynamism a stepup to a higher level.

The industry, which services over EUR 1

trillion in assets, is recognised internationallyas a centre of innovation in terms of productdevelopment and service levels across allfund types. New product types are alwayson the radar. Ronan Nolan, a partner atDeloitte Ireland, says there is an increasedfocus on private equity and ETFs (exchangetraded funds). Gary Palmer, CEO of the IrishFunds Industry Association adds, “Toanticipate market demands and to reflectmarket developments, the regulatoryenvironment for investment funds requiresconstant consideration. Some of the areascurrently under consideration includeproperty funds and private equity funds.”

Don McClean, head of fund services inIreland for UBS Global Asset Managementbelieves that QIFs (qualifying investor funds)continue to be popular for hedge fundmanagers. “Also, UCITS (undertakings forcollective investment in transferablesecurities) – because of the Ucits III shortingabilities – could see a major increase in usefrom traditional as well as hedge fundmanagers,” he adds.

Meanwhile, the recent Department ofLabor advisory opinion in the US may givesome momentum to cross-border pooling.The ruling has essentially given the all clearfor US pension plans to invest in taxtransparent pooling vehicles. There are signsnow of an increase in investment managerinterest in this area.

Andrew Dillon, Managing Director atBaronsmead Insurance Brokers Ireland, saysthat a lot of work is being done onincreasing efficiencies in the area of OTC(over the counter) derivatives and fund ofhedge funds. “These areas are not yet aswell processed (at an industry level) as moretraditional and mainstream instruments,” heclaims.

Palmer is also witnessing a shift betweenproduct types. “For example, stable moneymarket funds have become very attractive toinvestors as their preferences towardsequities and bonds diminish. Notwithstandingthis shift, Ireland has a wide spectrum ofproduct structures and, accordingly, asinvestment preference shifts, it can beaccommodated in Irish fund structures,” headds.

Another trend among fund serviceproviders in Ireland that is gathering

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On the samepage as you.We have a dedicated team of specialist professionals who focus specifically on the fundssector to deliver efficient and effective services and client focused advice.

To find out how we can assist you, please contact Ronan Nolan, Partner on 01 417 2200.

www.deloitte.com/ie

There is no doubt that the funds industry isone of the biggest success stories in Irelandwith assets under management in Dublinhaving more than doubled to over US$1.63tnin 2007 over the last three years. And whilethe sector is bullish about future growthopportunities, there are challenges andissues that need to be overcome in order tosustain the extraordinary growth we havealready seen.

Deloitte carried out its annual survey ofthe fund administration community in Irelandin 2007, in order to obtain an understandingof the key business issues facing theindustry. The survey acknowledged that thefunds industry in Ireland had seen a ten-foldincrease since the beginning of themillennium with hedge funds pegged as thefastest growing products. One of the notableaspects of the funds arena was the privateequity fund and the high servicing growthbehind it. This is consistent with a generaltrend in recent years towards the servicingof more complex, higher margin products,which is a positive development for theindustry in Ireland as a whole as it signals amove “up the value chain” of asset servicing.

Regionalisation and offshoring are high onthe agenda for fund administrators. Nearly15% of the industry is now located outsideDublin and over 40% of the respondents seethis trend (regionalisation) continuing in 2008.

In terms of offshoring, Irish basedadministrators, which are continuing to attractmore business particularly in productsrequiring high skill levels such as hedge fundsand private equity, are looking to lower costcentres to provide additional capacity inroutine and high volume activities. Anoverwhelming majority (72%) expect this trend

to increase in 2008 and in subsequent years.With a great geographical location, a

pragmatic regulatory environment and agreat business foundation, more and moreclients are now interested in setting up shopin Ireland.

However, to sustain this growth, Irelandmust surpass certain challenges that usuallyarise from high success. One major concernis the retention and recruitment ofexperienced staff. More than 80% ofrespondents stated this as a very significantissue. This goes on the back of anothersurvey that indicated that fund industryattrition levels are running close to 30%. Thisis imposing a significant cost on the industryas well as impacting service levels.

Other issues include costs, managinggrowth and the need to make systemschanges. More than 75% of respondentsintend to make significant systems changesor upgrades over the next 12 months. In2008, the industry expects significantimprovements to kick in with the majority ofrespondents predicting that BPR initiativeswill yield savings of between 6% and 15%.

Last but not least is the issue of riskmanagement, which has taken on a wholenew meaning since the start of the creditcrunch last year. Fund administrators areshowing an increased focus on riskmanagement, and this was identified as thenumber one issue being focused on in duediligence checks.

To sum it up, the fund administrationsector in Ireland still stands strong. Bycombating the above-mentioned issues andwith a continuation of positive sentiment withregard to future prospects, Ireland is poisedto sustain this growth. ■

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No complacency willmake future for funds

industry brightRonan Nolan

Ronan Nolan is Partner atDeloitte Ireland

momentum is the expansion and setting upof offices outside of Dublin. The main reasonfor this is the increasing cost structures,especially in real estate, linked to the capital.Many multinational and industry companieshave established operations throughoutIreland and are now located in centresoutside of Dublin – in Wexford, Waterford,Kilkenny, Cork, Limerick, Galway, Kildare,Meath and Louth. More companies areplanning to expand their operations outsideof the capital.

David Aldrich, Managing Director of TheBank of New York Mellon, explains, “Irelandcontinues to face two important challenges,capacity and cost. As the hedge fundservicing industry grows apace there areclear capacity constraints in Dublin forexperienced alternative fund accountants.Firms such as The Bank of New York Mellonhave responded to this by creating fullservice satellite offices in Cork andelsewhere around the Republic. This hashelped create capacity but has notaddressed the cost challenge, which hasbeen exacerbated by the rise of the Euro,since most funds serviced are dollardenominated and revenues are dollar linked.”

John Alshefski, senior vice president atSEI, says that companies in the IFSC havefor some time been actively looking atoptions elsewhere in Ireland to set upsatellite offices, and many have alreadytaken this step.

In terms of addressing the cost issue,help may be at hand in Northern Ireland,with recent regulatory developmentsfavouring an all-Ireland approach to fundservicing. A recent agreement was struckbetween regulators north and south of theborder whereby satellite offices establishedin Northern Ireland could continue to beregulated by the Irish Financial Regulator.

Aldrich adds, “The province has anadvantage in being GBP-based, since sterlinghas been historically less volatile against thedollar than the Euro.”

The recent US-NI Investment Conferenceheld in Belfast was actively supported byboth the Irish and UK governments, with theTaoiseach and Prime Minister attending, oneof the primary goals being the developmentof a securities servicing industry in theNorth, in partnership with the established

market in the Republic. “If this latest initiativeleads to the fund administration industrybeing able to tap into the supply of talent inthe North as effectively as it has in theRepublic, then this may bode well for acontinued expansion of the activity in thesouth to the benefit of the whole of theisland of Ireland,” Aldrich says.

Alshefski believes that the factors thatmake Northern Ireland so attractive mirrorthe factors that led to Dublin’s success. “Thehighly-educated and eager workforce,coupled with a lower cost environment, willcertainly lead outsourcers to considerNorthern Ireland as a prime location whenexpanding,” he adds.

Turnover timesA major initiative in Ireland was that inFebruary 2007, the Financial Regulatorstopped carrying out its pre-authorisationreviews of QIF structures and revamped itinto having a new QIF structure authorised

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To learn more about how we can help you manage your hedge fund operations, please contact:

David Aldrich +44 20 7163 3233Marc Russell-Jones +44 20 7163 3234

©2008 The Bank of New York Mellon Corporation. Products and services provided by various subsidiaries of The Bank of New York Mellon Corporation. Authorised and Regulated in the UK by the Financial Services Authority. BNY Mellon Fund Services (Ireland) Limited are regulated by the Financial Regulator.

Your friendly, local, global powerhousemakes running a hedge fund in Ireland easy.

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As the world of alternative investment grows,service providers to hedge funds need toadapt and restructure their offerings tosustain growth and keep clients happy.Administrators and prime brokers face toughtechnological and infrastructural challengesas they compete to provide services to thedynamic breed of hedge funds.

Prime brokers and custodians are inessentially different businesses. The primeswill make their money from transactionalactivity and financing; the custodians areprimarily outsource service providers ofsafekeeping, cash management andadministrative services. Now the linebetween these two is becoming blurred. Theapparent convergence between the twoworlds occurs because of the expansion ofadditional value-added products by bothgroups. However the custody and trustbanks generally do not have the risk appetiteof the broker dealers and are fundamentallyaverse to the leveraged financing that is thespecialty of the prime brokers.

And everyone seems to be getting into theact. The credit crunch has given a strongpush to financing counterparties that areowned by commercial banks. This is at theexpense of pure broker/dealer firms, forreasons of balance sheet strength.Examples of the winners from this firstphase effect include Citi, UBS, Credit Suisseand Barclays, amongst others. A secondphase of the credit crunch occurred whenBear Stearns nearly collapsed and was takenover by JPMorgan Chase. This phase ischaracterised by a move of unencumberedassets, both cash and securities, away fromprime brokers of all types and into purecustody accounts at banks such as TheBank of New York Mellon. This multi-billiondollar “reverse enquiry” activity, wherebyassets are moving at the insistence of thehedge funds and not at the suggestion ofthe custodians, appears to be designed toensure that these assets are free from the“de facto” restraints of a prime brokerage

agreement and “de jure” solely under thedirection and control of the investmentmanager.

The fact is that everyone wants toestablish long term relationships with theirclients, and providing additional “sticky”services is one of the ways that firms will tryto do this. The Bank of New York Mellonoffers a range of a la carte services, underthe marketing term “banking plus admin,”which collectively deliver to alternative fundmanagers a relationship closer to a marriagethan a date. Managers want stablerelationships with providers who areinvesting in their businesses through theprovision of class leading services.

While there can never be a truly one stopshop model for hedge funds, as the rangeand nature of their requirements are so variedand broad, what does work is the provision ofmultiple services by a single organisation,essentially a bespoke mix of solutions tomeet the managers’ needs for their funds.

Meanwhile, scale is becoming anincreasingly important consideration. Wehave just completed a multi-million dollarinvestment in transfer agency services tomeet the particular needs of one of ourbiggest European clients. We intend todeliver these services to other interested andsophisticated hedge funds, but we made theinvestment commitment initially based on justone manager’s needs. This option is onlyreally available to a few of the leading assetservicing organisations globally, and TheBank of New York Mellon is well placed to dothis with over USD 200 billion in assets underadministration in alternatives alone and atotal of over USD 22 trillion under custodyand administration across all assets types.

With the ongoing uncertainty, serviceproviders need to be smart to tackle thechallenges of increasingly complex securitytypes and an ever-changing regulatoryenvironment. Major international assetservicing organisations like The Bank of NewYork Mellon are primed to lead the way. ■

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Banking plus adminBy David Aldrich

David Aldrich is ManagingDirector at The Bank of NewYork Mellon

on a filing-only basis within one businessday. Since this groundbreaking change inapproach, dialogue has continued with theFinancial Regulator and the funds industry tofurther improve the QIF product from theperspective of fund managers and investors.

Now, another move is underway whichwill help the funds industry to cope withhigher capacity and, at the same time, savetime. The SWIFT initiative is poised tochange the landscape for funds of funds.SWIFT allows standardisation andautomation of many business flows includingaccount openings and maintenance, orders,transfers, reporting on price and cash flow.

Don McClean at UBS explains, “Theindustry has been dogged by manualprocesses since inception – uniqueidentifiers coupled with a standardmessaging platform will reduce costs, reducerisk of error, enhance trading and settlementefficiency and may force greater activity andliquidity in target funds as the industry isable to cope with larger volumes in a greatlyreduced timeframe.”

Another trend is the industry’s increasedfocus on best practices, which is beingdriven by more institutional asset allocations,the recent credit crisis and increasedregulatory scrutiny. The UK Hedge FundsStandards Boards touched upon five general

areas that funds should focus on, whichinclude disclosure, risk management,valuation, shareholder conduct and fundgovernance.

“SEI is providing the infrastructure,technology, and expertise to help our clientsstrengthen their operating environment. Forexample, we’ve established controls,automation and workflow processes tomitigate risk. Our clients also appreciate theannual SAS 70 audits we undergo, as itserves as another way for them to facilitatetheir compliance needs and increase theirtransparency into our operations,” Alshefskisays.

As the financial market place becomesever more complex, the regulatory regimewhich exists in Ireland for the creation ofinvestment fund structures is respondingaccordingly.

The regulatory perspective is seen as verypositive, in that the Financial Regulatorclearly recognises the imperative to combinea reputation for first class regulation withcompetitiveness and responsiveness toinnovation. The recent encouragement foractivity in Northern Ireland as well asregional locations in the Republic is a goodexample of this.

In general the funds industry believes thatIreland, from a regulatory point of view, is in

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good shape. “The regulator encouragessuccessful business activity in a strictlyregulated environment – it’s an attractiveenvironment for both investors and serviceproviders,” says McClean.

Institutions are continuing to invest inalternative investment funds, albeit morecautiously, given market conditions. In sucha situation, firms with experience, financialcapabilities and critical mass stand out. SEI’sAlshefski says that they are increasinglyconcerned about risk in all forms - headlinerisk, performance risk, regulatory risk, etc.“We are also seeing institutions influencingmore outsourcing decisions and conductingmore thorough due diligence onadministrators. In our experience, institutionsare looking for an administrator that hasname recognition and is a strong, stable andfinancially healthy company,” he says.

Consolidation is expected to continue tooccur this year, mainly because it’sbecoming more difficult for smaller providersto provide the level of technology andservices that hedge funds are increasinglydemanding. “Considering we’ve grown to ourcurrent size organically – over USD 115 billionin alternative assets under administrationand more than USD 400 billion worldwide –we know the level of investment intechnology and resources it takes to reachcritical scale. As institutions demand morefrom their hedge funds, such as enhancedreporting, greater transparency andcustomised solutions, that meansoutsourcers are also facing pressure toenhance their capabilities, which is oftenmore difficult for smaller providers withlimited resources,” Alshefski adds.

However, due to the vast spectrum ofproducts and services in demand, smaller,boutique fund administrators will also play animportant role.

The global economy has had, and willhave, a direct impact on the funds industry.New providers continue to enter the Irishmarket and this is balanced byconsolidation in the industry. Newjurisdictions are moving into the alternativeinvestment space and these jurisdictionsare carving their own niche. McClean saysthat the outlook for Ireland is continuedgrowth. “As always, the alternativeinvestment industry continues to invent new

products and new investment types, andpush the boundaries. Ireland’s success willbe determined by continuing to meet theseever increasing demands,” he adds.

Ireland clearly continues to be a veryattractive funds servicing location and, givenrecent developments to tap into the NorthernIreland market, will remain a cornerstonewithin the investment funds industry.Alshefski believes that, given Ireland’ssuccess in the funds industry, it has been atighter market when it comes to findingemployees to support rapid growth. However,he remains upbeat about this situation andnotes: “The amount of foreign nationalsworking in Dublin has increased and, withtheir high level of education and strong workethic, this is a positive development for theindustry.”

Deloitte’s Ronan Nolan emphasises thatavoiding any hint of complacency has to bea key requirement [in the development of thefunds servicing industry]. “The challenges ofretaining talent and managing serviceprovision in a rising cost environment can bemanaged, but requires unrelenting focus,” hesays. ■

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