Playing with fire
The hedge fund business can be extremely temperamental. Just ask the Carlyle Group. It saw its $31-billion fund collapse in six months. On the other hand, the John Paulson fund grew from $12 billion to $30 billion when the going was good. This market is a key focus for Fulcrum, a fund administration company, majorityowned by private equity giant 3i.
Besides the tempestuous hedge fund market, Fulcrum will also focus on fund of funds and private equity companies. “We will do backoffice accounting, profit and loss calculation and investor reporting for our clients,” says Akshaya Bhargava, a former Citibanker, who was CEO of Infosys’ business process outsourcing (BPO) arm before joining 3i and then moving to Fulcrum.
“Unlike traditional BPO companies, we don’t hire freshers; we recruit experienced accountants and cost accountants and our attrition is in low single digits,” says Bhargava. According to some estimates, large financial services companies such as State Street, Goldman Sachs and Citigroup account for around 60 per cent of the hedge find market (although Citi of late has been scaling down its hedge fund operations in the wake of huge writeoffs because of the subprime crisis in the US). Independent (and smaller) companies account for the rest. Besides the large players, independent operators such as Citco and Globeop, along with Fulcrum, are the key players in the market.
“Scale, in terms of assets under management, is a key metric in this industry. You have to have at least $50 billion in assets under management to be recognised,” says Bhargava. Fulcrum itself works with 1,000 different funds, has 400 employees and has over $100 billion in assets under management, he adds. Fulcrum added scale to its operations by merging with Butterfield Fund Services in early August to create perhaps the thirdlargest operator in the market. “We didn’t enter the market during the downturn, so we avoided the meltdown that many others suffered,” says Bhargava. Instead, he argues, large operators such as pension funds will look to invest in hedge funds to grow their portfolio in a stagnating or declining market.
“With some clever investments and using derivatives and short-selling, a hedge fund manager can even make money in a downturn,” argues Bhargava.
In the $2.7-trillion hedge fund market, the overall administration segment is just a sliver at around $2.7 billion, according to industry estimates. “Most of this administration is currently undertaken inhouse, but there are compelling economic and logistical reasons to outsource this work,” says Bhargava. Fulcrum’s engineers allow us fund managers to have updated portfolios when they arrive for work the next day. “They couldn’t have managed this without people in India,” he says.
For Fulcrum, growth will come in two ways; first, when the size of funds grows and, second, by winning new business, especially from funds looking for independent administrators. Yet, with the US financial services market continuing to reel from the aftershocks of a subprime crisis, Fulcrum will need to be on the lookout for major aftershocks.
—Rahul Sachitanand
