The 2016 Alpha Awards: Administrators

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1 The 2016 Alpha Awards: Administrators Institutional Investor s Alpha Georgina Hurst, 23 February 2016, Copyright Euromoney Institutional Investor PLC Illustration by Adam Simpson After nearly two years of development and hundreds of millions of dollars invested, financial services firm Citco is ready for a major change. The firm has begun rolling out CitcoOne, a next-generation web platform that consolidates investment managers' real-time data metrics and documents in a single environment. "We think it's going to be the new benchmark for the industry," says New York based Jay Peller, global head of sales and marketing at Citco, which has $900 billion in assets under administration. Peller, who joined Citco 16 years ago, says the firm built CitcoOne to provide a window into every major hedge fund business process, using the latest in data visualization tools. Citco's big investment in state-of-the-art technology already appears to be paying off. For the first time since the survey was introduced in 2005, Citco Fund Services tops the Alpha Awards ranking of the world's top hedge fund administrators, pushing three-time consecutive winner HedgeServ down one spot to second place. Northern Trust Hedge Fund Services moved down a rung, settling at No. 3, while State Street Alternative Investment Solutions stayed at No. 4. SS&C GlobeOp rounds out the top five, followed by BNY Mellon Alternative Investment Services at No. 6. The results reflect responses from hedge fund managers asked by Alpha last fall to rate their administrators in nine areas critical to their business. The 2016Alpha Awards Top Administrators:Top Firms By Aspectsof Service Hedge fund administrators responsible for net-asset-value calculations, fund accounting and risk analysis, among other functions and their clients are leaning on automated services and digital databases more than ever to access and filter big data and juggle complex instruments, analytics and reports for institutional investors, regulatory agencies, investor relations groups and more. As administrators of all sizes focus on developing best-in-class technology, the makeup of the workforce is changing to accommodate the needs of their clients.

2 "Financial services have always been slow to adopt new technologies, and these days the real innovations are coming from other industries solving different but very relevant problems," says Citco's Peller. Tapping into this talent network by hiring general technologists or those with a financial technology background is critical to keeping up with the demands of the alternatives world, he adds. Of the firm's total 5,800 employees, about 700 work in the technology group and 3,700 in fund services. Top Administrators Rank2016 Rank2015 Company 1 3 Citco Fund Services 2 1 HedgeServ 3 2 Northern Trust Hedge Fund Services 4 4 State Street Alternative Investment Solutions 5 6 SS&C GlobeOp 6 7 BNY Mellon Alternative Investment Services Like Citco, second-ranked HedgeServ is looking to recruit outside the finance world for top technology talent. The hedge fund industry is on an accelerating quest to get more information faster, explains James Kelly, chairman of the New York based firm. Mastering the complexities of aggregating and protecting information and building supporting technologies requires a lot of people with a very high level of expertise. HedgeServ is hiring experts from e commerce companies, he adds. "These people are dealing with the latest technologies that are moving a tremendous amount of data very quickly through the cloud," explains Kelly. "They're well ahead of the financial technology folks." As hedge funds insist on quicker access to more information, HedgeServ is aggressively evolving its technological resources: It invested more than 20 percent of gross revenue in new developments last year. "The pursuit of information through technology and the increasing complexity of that problem is a major theme that is causing large managers to more actively seek outsourcing solutions," Kelly notes. "Technology is absolutely key to being able to provide services today, and it's going to be even more important in the future." HedgeServ, co-founded in 2007 by Kelly, vice chairman Robert Aaron, CEO Eugene Mannella and president Justin Nadler, oversees about $330 billion in assets under administration. Though considered midsize among top-tier industry players, the firm has enjoyed considerable growth over

3 the past few years. Assets under administration have nearly doubled since "We're striving to be one of the three largest administrators," Kelly says. HedgeServ has 1,000 hedge fund focused employees working in New York, Boston, Cork, Dublin, Grand Cayman, London, Luxembourg and Sydney. The firm plans to open two more offices in the U.S. and Europe in Whereas HedgeServ says its status as a private company gives it the flexibility to make independent decisions, CEO Peter Sanchez of No. 3 Northern Trust Hedge Fund Services credits the bank's broader assets servicing business for his unit's competitive edge. Clients benefit from Northern Trust's global custody and fund accounting businesses and the cash and collateral management, trade execution, foreign exchange and risk and performance services they offer, he says. Sanchez has led the business since the bank's 2011 acquisition of Chicago-based hedge fund firm Citadel's Omnium administration unit, where he served as global head of business development and client service. He has since overseen a 1,340 percent growth in Northern Trust Hedge Fund Services' assets under administration, to $300.3 billion. The firm now has offices in 17 countries. As with the other administrators ranked here, nearly all of Northern Trust's technology systems are accessible to clients. "We built our technology not only as a tool for us to use as service providers but also for our clients to add to their desktop and use the data as we do," Sanchez says. Order of Importanceto Clients Rank2016 Rank2015 Aspect 1 1 Fund Accounting 2 2 Client Service 3 3 Hedge Fund Expertise 4 4 Investor Services 5 5 Reporting & Reporting Technology 6 6 Regulatory Expertise 7 7 Clearing & Settlement 8 8 Cash & Collateral Management 9 9 Bank Debt &Derivatives Support Northern Trust is working to roll out a proprietary investor accounting system over the next three years. The bank also has been focusing on trade reconciliation which Sanchez believes is the

4 cornerstone of any fund administrator by enhancing matching capabilities and workflow and exception processing. Meeting the demands of hedge fund clients, never an easy task, is getting harder as technology develops. "There's a theme of complexity around this industry that will continue as regulations evolve around the globe and specific client needs and requirements expand," says George Sullivan, executive vice president and global head of No. 4 State Street Alternative Investment Solutions. Sullivan joined State Street in 2007, when the bank acquired Investors Financial Services Corp., where he was head of global fund services. State Street Alternative Investment Solutions has offices in 15 countries spanning five continents, allowing its professionals to interact with different markets and use the resulting expertise to educate hedge fund manager clients. State Street's clients, like those of other administrators, want top-notch technologies. The Bostonbased bank has invested millions of dollars in building a database to support managers in satisfying their various requirements. These include advanced reporting tools to help with regulatory compliance, financial and tax needs; real-time dashboards providing accurate, transparent and easyto-consume data; risk management services; and technology helping managers off-load day-to-day tasks so they can focus on delivering performance. Across all of its businesses, State Street Corp. has $1.3 trillion in total assets under administration. Sullivan credits the sizable State Street franchise for allowing the hedge fund business to build out the hardware and software capabilities needed to keep up with clients. "The investment you need to make to create technology tools is not insignificant," says Sullivan, who oversees roughly $878.3 billion in hedge fund assets under administration. "When we can do it across the asset base we have and the roster of clients we have, it's done in a much less expensive way than for any one manager to do on their own." Like the other administrators in the ranking, No. 5 SS&C GlobeOp, based in Windsor, Connecticut, is also putting considerable thought into its hiring process, teaming up with universities around the world to find top-flight staff. "We need to recruit, train, develop and retain the best talent," says William Stone, chairman and CEO of SS&C Technologies. SS&C GlobeOp employs 3,500 people. Talented employees generate ideas, experiment and innovate, explains Stone, who headed the financial services consulting practice at accounting firm KPMG before founding SS&C in He compares the administration industry as a segment of financial services to Silicon Valley as a segment of the technology industry a hotbed of innovation and change. At its heart, SS&C Technologies is a commercial software company that provides cloud-based services for the financial services industry, he says. The firm's hedge fund administration unit is planning to introduce a new platform in the second quarter of this year that will give hedge fund clients tax forecasting capabilities. Stone hopes the service will prepare tax statements a financial quarter in advance of deadlines so managers can decide whether to sell or buy or complete a transaction that affects their tax situation.

5 In August 2015, SS&C bought Citigroup's alternative investor services division. The deal, valued at $425 million, is expected to close in the first quarter of this year and grow SS&C GlobeOp's assets under administration to $1.1 trillion. SS&C historically has been very acquisitive, snapping up some 43 companies across all of its businesses since Just as SS&C has changed, so has the broader administration landscape, reflecting hedge funds' demands for more from their service providers. Many universal banks are focusing on more-profitable core services, as evidenced by this year's Alpha Awards ranking, which features boutique administrators and custody banks but no investment banks. "The funds services business is a daunting challenge as administrators try to meet the needs of very sophisticated clients in a highly regulated industry with many vagaries as far as tax and valuations go," Stone says. Consolidation will continue. There are about 300 fund administrators today, but SS&C GlobeOp's Stone estimates that number will be cut in half over the next five years. SS&C started in fund administration in 2002; with the closing of the Citi deal, it will be the second-largest fund administrator in the world after Citco. No. 6 BNY Mellon also is looking to grow its alternatives administration business. The New York based custody bank has some $650 billion in hedge fund assets under administration from more than 500 single-manager and fund-of-funds firms around the world, including 75 of the 100 largest hedge funds. Frank La Salla, CEO of BNY Mellon's Global Structured Products and Alternative Investment Services unit, says that although private equity and real estate are the firm's fastest-growing business segments, it's still enjoying growth in its hedge funds segment, particularly on the singlemanager side. The bank has more than 2,100 employees committed to hedge fund administration. New York based La Salla, who served as head of BNY Mellon's securities services company Pershing in London before joining Alternative Investment Services in 2014, attributes this to "consolidation and consolidation." Hedge funds are reducing the number of service providers they use, and the number of hedge fund administrators is shrinking. Hedge funds are looking for a single source of information, technology, data aggregation and access. "We tend to be a natural choice for hedge funds because BNY Mellon is very strategically committed to this business," explains La Salla, who oversees $650 billion in hedge fund assets under administration. As with State Street and Northern Trust, BNY Mellon's administration business feeds into the bank's other core services, such as prime custody and securities lending. Most of BNY Mellon's assets under administration come from hedge funds, with more than $105 billion from real estate and private equity clients. As administrators evolve with their hedge fund clients, one thing remains consistent: They must increasingly lean on technology to move faster and differentiate themselves from competitors. Top service providers are buckling down and investing heavily in the sector. "Between the complexity that continues to grow in the business and the regulatory challenge we all face, the capabilities needed to do this business and serve our customers well are significant," concludes State Street's Sullivan.