Monthly Archives: February 2018

INDOS Financial awarded Cyber Essentials Plus certification

Independent AIFMD depositary, INDOS Financial, has obtained Cyber Essentials Plus certification. The certification involved subjecting the firm to an independent review of its IT and cyber controls, including vulnerability scanning of the firm’s infrastructure.

INDOS recognises the importance its clients place on the appropriate management and reduction of IT / cyber risk and believe that the government accredited Cyber Essentials Plus programme was a practical way of demonstrating this. The review was conducted by security specialists Pen Test Partners (www.pentestpartners.com).

Many hedge funds overpaying for depositary services

Evidence collected by INDOS Financial Limited (“INDOS”), the UK independent depositary, has revealed that many hedge funds have chosen not to revisit their administrative and depositary arrangements since the implementation of the AIFMD (Alternative Investment Fund Managers Directive) in July 2014.  “In so doing,” says Bill Prew, INDOS CEO, “some managers are missing the fact that their depositary charges are rising in line with assets under management resulting in unnecessarily high fees. In particular larger funds should demand a more tailored fee model from their depositary which reflects the work and risks involved”.

Four factors have combined to bring about this state of affairs.  The first is the regulatory burden faced by alternative investment managers following the financial crisis.  “No sooner had AIFMD bedded down than work began on preparations for MiFID II,” said Mr Prew.

“Once a regulatory hurdle has been negotiated, the papers are often filed away and attention turns to the next issue.” 

Separately, 2017 proved a generally profitable year for hedge funds not only in terms of performance but also asset growth.  Recent figures from Eurekahedge indicate net asset inflows of some $94.7bn into the industry, a dramatic change from 2016 which witnessed net outflows of $55.1bn.  According to INDOS, this positive reversal resulted in some lessening of the pressure to manage all costs within funds.

The third reflects the fact that the AIFMD depositary requirements in 2014 were new for many funds. The market for AIFMD depositary services was immature and approaches to pricing has evolved over time, meaning managers are able to negotiate better pricing today.

Finally, there has been a tendency for administration and depositary deals to have been negotiated as a bundled package, but whereas administration fee rates decline as assets increase, the same is not necessarily true for depositary fees.

INDOS notes that the fee rate for a typical contract for hedge fund administration will generally scale down as assets grow, perhaps from 12 basis points p.a. (on fund net assets) down to 8bps.  In many cases, however, INDOS has seen evidence of the depositary fee being fixed at around 2bps.  Thus a $250m fund would be paying $50,000 p.a. in depositary fees and a $1bn fund would be paying $200,000 p.a. It is rarely the case that a $1bn fund is four times the complexity, or work involved to service, than a $250m fund and a more tailored approach to pricing is required.

“In fact,” said Mr Prew, “the industry standard, set by INDOS back in 2014, incrementally lowers the fee rate from 2bps down to 1bps as assets grow. In a recent depositary mandate switch for a $1bn fund from a top 5 global administrator the overall fee was 1.3 basis points compared to 2bps, therefore saving investors $70,000 p.a. – a significant sum.”

“At this time of the year, investor focus on expenses increases since they want to understand ‘other expenses’ disclosed in year-end financial statements. The answer is, where possible, for a fund to unbundle administration and depositary contracts and thus to achieve a better deal for the manager and, more importantly, investors.  And now, as MiFID II has come into force, there should be time to dust off the old files.”

European Commission AIFMD Review – Industry Questionnaire – Responses invited

The Directorate General for Financial Stability, Financial Services and Capital Markets Union of the European Commission (DG FISMA) has mandated KPMG to provide a comprehensive study on how the “Directive of Alternative Investment Fund Managers” (AIFMD) has worked in practice and to what extent its objectives have been met. Further details are below however broad industry input is being sought to the review and the survey can be found by clicking here.

The assessment includes a general overview regarding the functioning of specific AIFMD requirements and how they work in practice, including:

a)     the marketing by EU AIFMs of non-EU AIFs in the Member States taking place through national regimes;

b)    the marketing of AIFs in the Member States by non-EU AIFMs taking place through national regimes;

c)     the management and marketing of AIFs in the Union by AIFMs authorised in accordance with this Directive taking place through the passport regime provided for in this Directive;

d)    the marketing of AIFs in the Union by or on behalf of persons or entities other than AIFMs;

e)     the investment into AIFs by or on behalf of European professional investors;

f)     the impact of the depositary rules set out in Article 21 of the AIFMD on the depositary market in the Union;

g)    the impact of the transparency and reporting requirements set out in Articles 22 to 24, 28 and 29 of the AIFMD on the assessment of systemic risk;

h)     the potential adverse impact on retail investors;

i)      the impact of the AIFMD on the operation and viability of the private equity and venture capital funds;

j)      the impact of the AIFMD on the investor access in the Union;

k)     the impact of the AIFMD on investment in or for the benefit of developing countries;

l)      the impact of the AIFMD on the protection of non-listed companies or issuers provided by Articles 26 to 30 of the AIFMD and on the level playing field between AIFs and other investors after the acquisition of major holdings in or control over such non-listed companies or issuers.

The study is focused on 15 EU Member States, but respondents from any countries (including non-EU) are welcome. We are carrying out an online survey until 15 March, which seeks input from the wide range of stakeholders impacted by the AIFMD, including AIFMs, depositaries, investors, distributors and asset managers.  We are asking for views on the AIFMD’s requirements, experience in applying them and the market impacts.

The online survey will be complemented by an evidence-based study assessing whether the AIFMD is effective, efficient, relevant and coherent and has had added value for the EU.

Broad industry participation is encouraged and the link to the survey is here.

https://surveys.kpmg.de/fisma-aifmd-open-link/indos

 

INDOS Financial grows past major milestone

Assets under depositary increase by 54% to over $20bn

INDOS Financial Limited (“INDOS”), the UK independent depositary, has passed the milestone of undertaking depositary services for 100 alternative investment funds with assets over $20bn.  These figures represent a substantial growth in the business of 37% in the number of funds (from 73) and 54% in assets under depositary (from $13bn) since end-December 2016.

Welcoming this rapid business growth, Bill Prew, INDOS CEO explained that the added value arising from the employment of an independent depositary, as opposed to a depositary affiliated to the fund administrator, was becoming increasingly recognised by fund managers, fund directors and investors.

“In many cases,” said Mr Prew, “depositary services are viewed as a tick-box subset of fund administration but this model inevitably results in conflicts of interest given that one of the key roles of a depositary is to oversee the output of the administrative function and flag up problems.”

“INDOS is responsible for reviewing each NAV calculation and providing the fund manager and the Board with regular, tailored reports,” Mr Prew added, pointing out that INDOS is actively present (either in person or via telephone) at the majority of fund board meetings.  “By contrast many managers who transfer their depositary requirements to us say they had little active engagement with their (former) depositary and were very rarely notified of issues whether at their affiliated administration business or otherwise. In several cases we have identified issues following take-on that clearly existed previously but were either not identified or went unreported”.

Other factors have made an important contribution to the firm’s expansion.  Originally founded to provide ‘depo-lite’ services to hedge funds as the AIFMD (Alternative Investment Fund Managers Directive) came into force, INDOS has now broadened its range to include private equity and real estate funds, some 27 of which are now clients.  Since May 2017, the firm has evolved further to offer full depositary services to UK unauthorised funds such as investment trusts and has recently announced two new clients in this area.

“An important feature of the increasingly strict regulatory environment in which investment managers now operate is the responsibility to achieve value for money from all external service providers,” said Mr Prew.  “INDOS has achieved the scale and industry reputation where it regularly competes as an independent depositary against affiliated providers for larger mandates, delivering a tailored, value-add and more cost-effective service to clients”.

Contacts for further information: 

Bill Prew, CEO, INDOS Financial Limited                                      +44 (0) 203 319 1590
[email protected]

Simon Rostron, Rostron Parry                                                            +44 (0) 7802 292 252
[email protected]

About INDOS Financial (www.indosgroup.com)

INDOS Financial specialises in providing independent AIFMD depositary services to alternative investment funds. INDOS was the first FCA authorised AIFMD Depositary in January 2014 and currently provides depositary services to 100 funds that have more than $20bn in assets. Clients include EU and non-EU managers managing a broad range of open and closed ended alternative investment fund strategies ranging from hedge funds, to private equity, real estate and other closed ended funds such as UK investment trusts.

The firm holds regulatory permissions to undertake both depositary-lite and full depositary business. INDOS’ team of experienced staff utilises its own proprietary DEPOcheckTM system, an integrated workflow management and automated monitoring solution to deliver efficient solutions to its clients. INDOS has been recognised as Best Depositary Solution for two consecutive years in the 2016 and 2017 HFM Service Awards.