Consolidation has been a recurring theme in custody for more than a decade, with global custodians snapping up their smaller competitors. However, in recent years custodians have also been acquiring what on the surface may appear to be rather strange bedfellows: hedge fund administrators. The custodians saw an opportunity not only to service their investor clients who were expressing more interest in diversifying their investment portfolios but also to offer operational and administrative support to hedge funds themselves, an area that was traditionally the preserve of investment banks offering prime brokerage. There are different nuances to alternative investments that need to be considered. For example, hedge funds and private equity funds have different structures. While private equity has more low-volume reporting cycles, hedge funds on the transfer agency side are very performance focused, and they also use a lot of derivatives. Banks need to achieve the right balance between systems and people in the alternatives space.
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