Size Matters: Smaller Hedge Funds Are More Satisfied With Their Service Providers

Jul 2 2007 | 2:52pm ET

Larger hedge funds are less satisfied with their service providers than smaller ones, according to a recent survey by FINalternatives. For example, hedge fund managers with less than $10 million in assets under management rated their administrators’ competence as excellent nearly 40% of the time, while those with between $10 million and $100 million did so more than 57% of the time. By contrast, the largest hedge funds—those with more than $500 million in assets—gave their administrators the highest competency ranking only 19% of the time, and almost 30% complained of poor competency.

More than 500 FINalternatives readers responded to the survey, which was conducted in May. Managers responding were asked to rank their administrators and prime brokers on value for cost, personal service and competency. In general, emerging managers—those with less than $10 million AUM—are most satisfied with their service providers, while the largest—those managing more than $500 million—are the most dissatisfied.

More than half of emerging managers gave their administrator an excellent price rating, compared to just 19% of the largest managers. By contrast, almost 30% of managers with $100 million or more in assets rated their value for cost as poor or fair. (While no emerging manager gave an administrator the lowest value ranking, poor, one-third said it was fair, exceeding the combined fair and poor ratings for all managers with $10 million or more in assets.)

Similarly, satisfaction with administrators’ personal service falls off dramatically as asset levels rise: Emerging managers said their administrators were excellent almost 75% of the time; those with over $500 million concurred less than 40% of the time.

The trend is less striking in managers’ assessment of their prime brokers, but no less evident. Almost 85% of emerging managers say the value they get from their prime brokers is either good or excellent; for the $10 million to $100 million group, the number is 69%, and for the $500 million and up club, it’s just 60%. In fact, the smallest funds are more than four times as likely to rate prime broker value as excellent than the largest.

Emerging managers give their prime brokers an excellent personal service rating almost 70% of the time; the largest hedge funds do so just 40% of the time. Emerging managers call their prime brokers’ competency excellent 47% of the time; the largest only do so 40% of the time.

The results suggest that prime brokers that improve their service to larger customers may gain a distinct competitive advantage in the industry.

Another statistical question we asked of the survey was, “Can the choice of a service provider actually influence the growth of a fund?” The answer turns out to be a resounding, “yes!”  In particular, higher-priced prime brokers and administrators with better personal service appear to better promote a fund’s growth.  The underlying reasons for the observed dependencies may have several underpinnings.  Higher-priced prime brokers, for example, tend to have established capital introduction capabilities.

Administrators who go out of their way to understand their clients’ needs may deliver fund-aligned messages to the fund’s clients, building trust and confidence in the funds’ clients’ minds.

This article appeared in the July 2007 issue of FINalternatives Prime Brokerage & Administration.


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