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Why can’t we all just get along?
Collaboration in the Fund Administration Industry is Not a Weakness but an Opportunity (A version of this article appeared in Issue 4 of Global Banking and Finance)
Robert Kennedy once said that “Progress is a nice word. But change is its motivator. And change has its enemies.” While the Kennedys, or even politicians, might not be everyone’s cup of tea, they dreamed big. ‘Moonshots’ is a term that is now used to encapsulate the desire to achieve the unachievable, a reference to Jack’s famous ‘we choose to go to the moon’ speech.
What does this have to do with hedge fund administration? It is not an obvious parallel.
Every firm sets out to be a leader in their industry, to beat the competition, to be more successful than the next. In business, out-performing the market is the main goal, if you don’t count offering the best services to clients, which should be a given. You have to be better and, at times, accomplish this goal at the expense of the others. There is little room for sentiment. ‘Nice guys finish last’, we are told.
It may be worth considering if there may be a more strategic way to achieve better outcomes for all players. Typically, when firms align, it is in the context of some form of merger or acquisition. As we recently became an independent fund administrator, we have first-hand experience of being part of this corporate activity and we have seen the advantages and pitfalls. What has remained through this experience is how the needs of the ultimate beneficiary of our efforts, the investor and the manager, are not always considered in these changes. So what does that mean?
For us, we feel it’s an opportunity to take a fresh approach to how our industry is constituted All around us there are examples of how our world has advanced because preconceived ideas were turned upside down. What makes us think that providing support to the alternative investment community should be any different when it comes to radical change?
There is a real sense of turmoil in the administration world today as the ‘return to core values’ that is underway across the financial markets creates a new service provider landscape. In many cases, service provision models that investors chose have been dramatically altered. This leads to concern about future stability and priority of the new firm or entity. The investor often has to reconsider the lens through which they viewed their choice and the industry through because of these changes.
It is my belief that the provision of administration to hedge funds is best done via an independent administrator who is not affiliated with any other aspect of the investment process. This allows a strategic collaboration that is designed to deliver a quality, independent service to both the manager and investor. So how can you achieve this and also meet the ever changing needs of the market and the investor?
We all know that one of the biggest challenges all administrators currently have is how to meet the increasing demands of clients. There has been a massive increase in regulatory requirements, advanced technical complexities and a general expansion of the expectations of the client. All of this must be delivered in a cost effective manner, as the pressure on margins in every area of the business increases. There are many ways for firms to address these demands, but maybe there is one solution that has not been considered.
This is where the ‘moonshot’ comes in. If we were to design our industry’s model from the investor backwards, instead of the service provider, we might come up with a very different model. It is an interesting exercise to undertake and something that has resonance in other areas of business. Reverse engineering our operational models is something that we are all familiar with, but done from the point of view of the client, can throw up some interesting results. I have heard a number of times recently from both managers and investors that there are features of our business that they admire and would love to avail of, but at the same time, not lose what they have with another trusted provider who offers something complimentary. What is the barrier to this?
The question that is worth considering is whether we are brave enough to find ways to collaborate with other players in our industry to offer our clients something better, but at the same time, preserve our own identity and purpose. Is there room for an affiliation between service providers that puts the interest of the client first? Maybe there is, why not consider it at least?
Preserving the integrity of our firm is something that is to the forefront of every CEO and it is often the case that collaboration with another firm is not possible. However, maybe this alignment doesn’t have to be in totality? If it makes sense to work together to provide something that outperforms what is currently being offered in the market, then why not explore it?
The reasons not to collaborate would appear to be more human than technical. Ego, ambition, self-preservation and mistrust are an example of the human factors that appear when firms come together. The natural and initial reaction is to advocate the strengths of your own firm and denigrate your competitors. What if it were possible to put these factors aside for one moment and see if there is an alignment that could be converted into an offering that goes beyond what is available in the marketplace, but still allows both firms to continue on their own path?
There is no easy answer to this question and it is a challenge to find an audience that is willing to discuss it. Traditionally, such a conversation between service providers would have to indicate a position of relative weakness on behalf of one of them. However, what if this was not the case? As a newly reborn independent administrator, we find ourselves looking at all options that could further enhance our services to clients, but at the same time allow us to preserve this new identity that we have worked hard to regain. One of the obvious avenues to explore is with colleagues in other areas of the industry that have complementary strengths to ours, but at the same time, value their independence, like we do.
The evolution of firms is often as a result of the combination of their own strategy and the needs of their clients. In Custom House, our decision to open in Chicago in 2005 and Singapore in 2007 was due to both our desire to have these regional presences and the demands of our clients. I have noticed other firms who have had similar evolutions that led to different outcomes, such as a speciailsaton in a particular asset class or even advancement in a specific client driven technology. The lesson is that not every story is the same but what is constant is the increasing sophistication and demands of the client and also the globalistaion of the investment industry. So could firms come together and meet all of these demands, offer better service and value to investors and of course, deliver growth? Maybe, so why not consider it?
One way of meeting the challenges of this next phase could be the collaboration concept. Two firms coming together to combine their strengths could provide the combination of a specific technical expertise and a particular regional presence, for example. The benefit to the Manager and the Investor is that there is an immediate acceleration to preferred service model that could also be cost effective as there is not the capital outlay required build the missing component. Enhanced service at no extra cost to the Investor, isn’t that what the goal should be?
It is a topic that is not openly discussed and a question that is not asked enough, which makes us want to consider it some more. Maybe this is one ‘moonshot’ for the hedge fund administration world, and if so, shouldn’t we at least explore it?