Preqin: Hedge Fund Service Providers Under Pressure On Costs, Quality

May 10 2017 | 10:44pm ET

One in every four hedge fund managers changed at least one service provider last year, with cost and dissatisfaction cited as key factors, according to new data compiled by industry information provider Preqin. 

There is a long line of potential vendors waiting to pitch every hedge fund manager, ranging from fund administrators and custodians to prime brokers, auditors, marketers, and law firms. Accordingly, turnover among service providers is to be expected; a quarter of all hedge fund managers surveyed by Preqin at the end of 2016 changed at least one service provider during the year, with 75% changing one service provider, 18% changing two, and 7% changing three or more. 

Two concerns dominated the decision to change, Preqin’s research suggests: Cost and quality of service. Firms that switched administrator, custodians, auditors and law firms most likely did so because of cost, while those that changed prime brokers and marketers mostly did so for reasons of dissatisfaction with the service they received, Preqin said in a statement. 

Other key facts from Preqin’s Hedge Fund Service Provider Survey: 

  • The majority of firms (55%) cited cost as a key reason when changing service provider, with 21% citing dissatisfaction of service. Growth in a hedge fund’s AUM (20%), investor concerns about the service provider (19%) and coping with regulations (15%) were also factors when changing service provider. 

  • Of those that changed service providers, the largest proportion (39%) of hedge funds changed their prime broker and the smallest proportion (19%) changed their fund custodian. 

  • From the start of 2016 through Q1 2017, the Big Four (KPMG, EY, Deloitte and PwC) audited 79% of all hedge fund launches, and 93% of hedge funds with $1 billion or more in AUM. 

  • Morgan Stanley Prime Brokerage serviced 30% of hedge fund launches from the start of 2016 through Q1 2017, and is the most commonly used prime broker for hedge funds based in Europe, Asia-Pacific and Rest of World. 

  • Of the hedge funds that changed service providers, 20% changed their law firm, with 42% citing cost as a leading reason for the switch and a third citing dissatisfaction with the quality of service. 

  • The majority of marketers work with one, two or three hedge funds, although a notable proportion (14%) work with ten or more hedge funds. 
Amy Bensted, Head of Hedge Fund Products: 

“Service providers are a vital part of the hedge fund landscape, assisting in the smooth running of operations,” said Amy Bensted, head of hedge fund products for Preqin. “They perform vital services in the industry, such as custody and valuation of assets, facilitating securities lending, providing advice on regulation and fund terms, and assisting with the fundraising and investor subscription processes. [However], in order to retain hedge fund clients and win new business, service providers need to address concerns over cost and quality of service, particularly as investor scrutiny over fees and performance continues to grow.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. More than 40,000 professionals in 90 nations use the company’s products.

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