Q&A: The View From The Administrator's Seat

Jan 29 2013 | 1:35pm ET

Stephanie Miller was named global head of J.P. Morgan's Alternative Investment Services business almost a year ago. With some $18.8 trillion in custodial assets and $5.5 billion in alternative assets under administration, she sits at the helm of one of the largest hedge fund and private equity administration businesses around.

Miller, who joined JPMorgan Chase after stints at Citco Fund Services and Credit Suisse First Boston, recently spoke with FINalternatives Senior Reporter Mary Campbell about regulation, risk management and the outlook for 2013.

How would you describe the impact to date of tighter regulations within the hedge fund administration space?

Tighter regulations have had numerous impacts on the marketplace from increasing barriers to entry to changing the way hedge funds run their businesses. Funds with less than $250 million in assets are faced with significant start-up costs and, therefore, need to have a clear path to growth and sustainability. This forces a quality improvement in the market as only the strong survive. Moreover, as funds of all stripes venture into the marketplace, they need to understand the global regulatory roadmap. It is this very understanding that will allow managers to grow their platforms. Specifically, managers need to set-up repeatable processes whereby they singularly or in conjunction with a third-party provide, compile, file and track regulatory reporting that ultimately feeds into their larger overall policies and procedures and governance structure.

Have you noticed changes in hedge funds' approach to risk management? If so, have those changes had an effect on hedge fund administrators?

Risk management is a clear focus for managers. Drivers are not only regulatory, but also investor demands. It is not uncommon for investors to ask their managers about service providers, and Form ADV in fact has information with respect to service provider choice. Clearly, the fund administrator is important in this analysis in terms of robustness of procedures and staying power. Also, at a portfolio level, fund administrators can help analyze risk employing, among others, VaR models. What makes the position of the fund administrator so powerful is that oftentimes it has a ‘look through’ to the manager’s entire book, and that level of consolidation uniquely positions it to provide a comprehensive end-to-end solution including risk services.

What trends did you see in the hedge fund industry in 2013?

The number one trend we see is towards having a differentiated service and product offering that is institutional in nature. That means choosing reputable and proven blue-chip service providers and active risk management, broadly defined. The focus on the outsource provider being a source of stability and resiliency is key in the decision-making process. In terms of product expansion, we see larger managers expanding the waterfront they cover to capture the ever increasing institutional wallet.  Hybrid funds, multi-manager platforms and registered vehicles are a few examples of this expansion.

What is the outlook for the alternatives space in 2013?

The larger alternatives space—direct hedge fund, private equity and real estate vehicles—will continue to grow as institutional investors continue searching for risk-adjusted yield in the face of mounting liabilities. Pensions, insurance companies and traditional asset managers will be also fueling this expansion. One of the keys to attracting institutional-grade capital will be a robust operational infrastructure, sound policies and procedures and the ‘right’ tone from the top. The aforementioned overall paradigm will benefit larger managers and we see this in net inflows into the $5 billion-plus managers.

On the fund of funds side, there has been a clear investor focus on the larger, best-performing platforms with some institutional investors looking to displace the original fund-of-funds fee models and bring more functions in-house.

Do you think institutional interest in alternatives will continue to grow this year?

Institutional interest in alternatives will continue to grow. One must remember that this growth can also be tied to the evolving ability of institutional investors to bring functions in-house and to specifically manage risk across their portfolios. An equity long/short portfolio could very easily fall into a larger traditional equity allocation "bucket" as the strategies can be viewed jointly from a risk perspective.

Given your experience in both the U.S. and Europe, would you say there is any difference in the response of U.S. and European managers to increased regulation?

The response to regulation has been strong across regions. Although timelines and required information and rules vary, managers are increasingly aware and focused on how their businesses will need to adapt to new regulations. Europe is different in that there are some regional variations per country, and the U.S. is different in that in certain cases some harmonization needs to occur between Securities and Exchange Commission and Commodity Futures Trading Commission rules.

Do you think more European funds will choose to locate onshore rather than offshore as the European Union Alternative Investment Fund Managers Directive comes into force?

Across the globe, institutional investors have increased their allocations to alternatives. Accordingly, as AIFMD comes online, some institutional investors will require managers to have European onshore vehicles as part of their product sets. A key future consideration will become the cost premium associated with onshore vehicles and the associated benefit to having a European regulated fund.

What do you see as the future of UCITS funds?

With AIFMD coming online managers may still opt to run UCITS structures and accordingly we think the market will continue to bear these structures in the short-term. Notwithstanding this multiple-product paradigm, active monitoring of this space is prudential given UCITS VI consultations on the horizon, and specifically dialogue around eligible assets. We anticipate continued change here.

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