NorthPoint’s Nelson Talks Prime Brokerage Trends, Sees Uptick In Hedge-Like Mutual Funds

Aug 2 2011 | 10:04am ET

Ownership may have changed for the ConvergeEx Group, but it’s business as usual for its prime brokerage arm NorthPoint Trading Partners, says NorthPoint CEO Doug Nelson.

“Basically what’s happened is the ConvergEx stockholder base has changed somewhat but the company itself, the operation of the company, has not changed, the management has not changed,” Nelson told FINalternatives.

CVC Capital Partners recently agreed to buy part of Bank of New York Mellon’s one-third stake in the ConvergEx Group, a provider of investment and execution technology solutions. The deal (rumoured to be worth $1.9 billion) leaves CVC as the group’s largest shareholder, with BoNY-Mellon retaining a minority stake.

NorthPoint (which became part of the ConvergEX Group in 2009) provides prime brokerage services to professional investors including hedge funds, family offices, mutual funds and registered investment advisors. The firm has added about 35 new clients since the beginning of 2011 and average client size has grown “quite a bit,” according to Nelson, since NorthPoint was acquired by ConvergEx.

As part of a tech company, NorthPoint is also positioned to provide execution technology, which in an era of increased oversight and regulation, has proved to be a real advantage.

“There’s been a lot more need for infrastructure, people are having to build out infrastructure for compliance reasons and [because of] the coming regulation, so we’ve definitely seen much higher demand for technology infrastructure and technology services and risk reporting, things like that,” says Nelson.

Another “sub-trend” that plays to NorthPoint’s strengths, says Nelson, is the growth of mutual funds that are now doing things traditionally reserved for the hedge funds universe.

“What’s happening is that there’s a lot of investor demand for alternative products, but not all investors can invest in limited partnerships—because either they’re not accredited or their entities don’t allow for it—so the investment community is basically filling that void by either creating new mutual funds or converting existing mutual funds [into ones] that do alternative strategies.”

“There are some hoops you have to go through there…if you’re a ’40 Act mutual fund, you’re required to custody at a bank, but those companies normally can’t provide custody of shorts or options or things like that, so typically these mutual fund companies need a firm like ours that can arrange the structure that’s needed in order to accomplish that.”

Nelson says NorthPoint serves both “existing mutual fund families that want to either convert a fund or start a new one” or “hedge fund complexes that want to launch a new mutual fund to take advantage of what they’re doing in a mutual fund format.”

Both trends, as Nelson pointed out, are driven by the increasing regulation of the hedge fund space, something he says could actually be positive for the industry:

“I’ve never had any problem with regulation…provided it’s the right regulation. You look at something like the mutual fund industry which exploded after it got regulated—exploded in a good way, meaning it grew by leaps and bounds once it got regulated. Regulation doesn’t scare me. In fact, I think some regulation is important for the space to grow. What concerns me is, oftentimes there’s just a reaction and regulations are created that don’t really address what they’re intended to address and just create burden that’s unnecessary…Regulation I am all for, but the right regulation.”


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