01/05/07 - Archive - Hedging Their Bets

Hedging Their Bets

Source: Wall Street & Technology RSS
By: Tim Clark

As competition forces hedge funds to move into more-complex instruments in search of higher returns, middle- and back-office functions also are becoming more complex and cumbersome. Combined with the pressure to comply with corporate actions regulations and Sarbanes-Oxley, the growing burden is leading a rising number of hedge funds and fund managers to outsource middle- and back-office functions, thus allowing investment managers to focus on what they do best: turn profits for clients.

"As hedge funds move more aggressively into OTC instruments, the infrastructure necessary to manage the entire life cycle of the investment process can be quite cost prohibitive," explains Sang Lee, analyst, Aite Group. "Fund administrators are in perfect position to alleviate this issue so that hedge funds can continue to focus on their investment strategy and leave the middle-office and back-office operational complexity to the fund administrators."

In light of the rising popularity of the OTC derivatives space, which currently retains some $360 trillion worth of outstanding contracts, according to analyst estimates, leading fund administrators, such as JPMorgan and Citigroup, are building out their fund administration services. "Removing the distraction of running a middle and back office can help investment managers trade more effectively, which can increase their revenue," says Peter Salvage, product head, hedge fund operations, JPMorgan Worldwide Securities Services. "A hedge fund manager doesn't necessarily have the people, processes and expertise in place to really put its systems and processes through the ringer every day like we do on our side."

"Fund administration is an area that has typically been viewed as a back-office space and is now getting more and more front-office oriented," says Chandresh Iyer, managing director, North American head of securities and fund services, Citigroup Corporate and Investment Banking. "The OTC derivatives space is causing a need for the back-office infrastructure to scale to growth and provide more-sophisticated capabilities for managing risk, reconciliation of complex securities and pricing of hard-to-value securities.".........

...... operations of Paloma Partners Management Co., part of a privately owned investment fund management group based in Greenwich, Conn., in February 2006. "This acquisition allows us to immediately offer our hedge fund clients a high-quality option -- ......