The general movement towards institutionalisation in the hedge fund industry has become a common theme, which is driven partly by increased investor demands, and also arguably by the simple inevitability of maturation of a sector which is still relatively young in comparison to the rest of the finance world. Institutionalisation is by no means a bad thing, delivering increased efficiencies, but Centaur Fund Services, winners of The Hedge Fund Journal award for the Leading Hedge Fund Administrator in Client Service and Innovation, identified a gap, which the large institutions did not quite cover, for a fund administrator which had institutional-standard processes, but which nevertheless retained a more boutique, personal client service model.
Centaur was founded in 2009 by Ronan Daly, Karen Malone and Eric Bertrand. Clearly this was not an ideal time to be launching any kind of new business, but it is perhaps a measure of their confidence in their ability to set themselves apart that the dire economic situation did not ward them off. Within 18 months Centaur was profitable, and they have steadily grown their client base from there.
A tale of two strategies
The fund administration space is pretty crowded, with a lot of very big players, but Centaur have demonstrated that they can carve their own niche. Their main innovation is not, as is often assumed in such a complex sector, technological, but is rather based on client service, using the best technology available.
Daly explains Centaur’s approach to fund administration as a marriage of the necessary institutional-style processes and a more tailored, hands-on client service model, in which smaller clients are valued in just the same way as the bigger ones. “The idea is to have a very solid business; investment in technology and people from the outset has helped Centaur deliver exceptional service to all our clients.” Although the firm is relatively young, the founders have worked together for over 16 years, running the second largest Hedge Fund Administration business in the world – Citi Hedge fund Services (formally Hemisphere and BISYS Hedge Fund Services). This gave them the expertise in running an administration business during the early stages of the growing hedge fund market and through a number of sizeable integrations before embarking on establishing Centaur.
“The banks have a different business model because of their size and by the nature of their structure they need different processes and this does not always suit the fast moving pace of Hedge Funds,” explains head of business development Gavan McGuire. “Centaur’s business model is very focused on the needs of the investors and of the managers, and as such the offering is far more engaging than a call centre approach,” explains McGuire.
Daly sees this as a wider story than just Centaur; fund administration is becoming more and more polarised as the business matures. “Very often the large service providers have little or no appetite on the more boutique hedge funds, guys running less than $1 billion,” he says. At the other end of the spectrum we see some very small administration companies who really have very little in the way of infrastructure, management and depth.” Centaur’s model bridges this growing gap.
In recent years there have been cases – not many, but some – where the administrator has faced legal action. Weavering Capital and Madoff are the two cases that immediately spring to mind where the underlying assets did not match the numbers being reported. One of the many upshots of these isolated but damaging scandals has been that administrators are wary of taking responsibility, to the point that the term “calculation agent” has started to be used, rather than administrator. These attempts to absolve themselves from blame, both reputational and legal, have left what Centaur see as a gap for accountability – Centaur does not contract out of liability or responsibility.
“The other real schism in the business,” says Daly, “is between people like us who say that it is our job to produce the net asset value, which includes making sure the valuation of the underlying asset value is appropriate and reasonable, versus some people in this business who see their job as essentially just adding up numbers without asking where those numbers actually come from.”
For this reason Centaur have made accountability one of their key commitments, and an integral part of the client service model. Daly stresses the nature of accountability in the business. “It runs right through our business like a hallmark going from top to bottom,” he says. “When we talk about accountability it is on a number of levels. Most important is philosophical accountability. When our staff join our business they understand that we take responsibility for what we do.”
Perhaps unusually, this commitment is backed up in practice, and in fact legally. Where some administrators contract liability out of their businesses, or cap liability, Centaur do not do this, they are contractually liable for negligence rather than the more usual gross negligence. In such small differences lies a completely different business model.
“The biggest frustrations that I think clients were experiencing were lack of accountability if something went wrong,” says McGuire. “You’ll always have a bridge to cross. Things will come up – for example FATCA and currently the very topical AIFMD – and they’ll need help. Clients were finding that they needed direction, and some administrators were unwilling to engage in a discussion.”
Shift to the investor
One of the most prominent drivers of change in the hedge fund service industries has been regulation, but it is arguably investor concerns which are more important, and exert a stronger force. Centaur feel they differentiate themselves with regard to investor servicing. Centaur has found that being readily available to the investor is a major positive, especially for their newer clients.
“For many years managers were able to dictate terms to investors,” says Daly. “The balance of power shifted after 2008, and now increasingly managers will listen to investors and what investors want, and so service providers like ourselves have to be responsive in talking to investors and understanding what they want.”
This means being responsive when investors are carrying out their due diligence; investors are now making regular visits to the Dublin headquarters, Centaur accommodate these visits and has actively encouraged due diligence visits from managers and investors. They also try to drive the conversation in the hedge fund community, which is why they have recently started holding client clubs, in which CFOs and COOs are invited to talk about the business and hear expert opinion in a more casual setting.
Another aspect of the service is committing fully to meeting the needs of investors after investment. For instance, Centaur have an unqualified ISAE 3402 (which superseded the SAS 70 regime), and were one of the first to be able to offer full OPERA risk reporting.
Technology in tune with the culture
One of the advantages of starting a new business is that it gives the freedom to pick the best systems without being burdened by the legacy of old processes.
“We were very fortunate in the beginning,” explains Daly, “because we started with a white piece of paper and were able to build what we thought was best and continue to develop from that solid base.” On the technology side this meant investment directly in the systems which the Centaur founders believe to be the best in class. They have been running Sungard InvestOne as the accounting system, and for investor servicing they use HWM Mantra, a leading hedge fund investor system.
Cloud computing has also been a large part of the Centaur model from the start – “The cloud is the way the world is going,” says Daly – with all of the advantages for efficiency and, importantly, disaster recovery that brings. Another area of expansion in the product offering is middle office functionality with enhanced web reporting.
The type of people Centaur hire is critical to the success of the Company. Management work hard to ensure that their staff are committed and, of course, responsible, and they also encourage staff to become qualified; most of their staff have an accountancy background, and Centaur are an ACCA-accredited accountancy training firm.
“Our technology has to be top-tier, but the people are the biggest part behind it,” says McGuire. “You can’t have a canned approach; flexibility is required. The people that we employ and work with in the business are hedge fund specialists that have been doing this a long long time. They understand the business.”
The next big stage of the plan is to open an office in New York within the next 12 months, with a model identical to that which has been effective in Dublin and London. Centaur are confident in their offering, but “We’re not looking to have thousands of clients,” says Daly. “This business is not infinitely scalable.” There is, however, room for more expansion to continue the growth of the last few years.
With their emphases on accountability, client service and transparency towards investors, coupled with the institutional-style infrastructure which the market has come to expect, it is easy to imagine that any expansion across the Atlantic will be greeted with the same degree of success and steady growth. Certainly, Centaur will continue to think of themselves as a hedge fund specialist administrator.