Finadium: Custody for long/short funds

Finadium has released a new research report, “Evaluating and Selecting a Custodian for Long/Short Investment Funds.” This report is a discussion of important points for long/short funds to consider in evaluating the success of their custodial relationships and in selecting a new custodian.

With foundational changes instituted since 2008, the imperative that drove investors to demand greater transparency from their fund managers also prompted custodians and prime brokers to alter their service offerings for long/short funds. Long/short funds now have a variety of custody and leverage service models to choose from including Prime Custody, Enhanced Custody and other prime brokerage/custody hybrids.

Custodian banks have responded to the sharp growth in long/short funds by offering specialized custody services including Prime Custody. Todayʼs global custodians are key providers of core custody and value-added services including striking the daily Net Asset Value (NAV) of a fund and providing access to securities borrows and leverage within their own account. While not all custodians have fully embraced the business of prime brokerage, they now offer enough overlapping services that a fund requiring some prime brokerage can elect to work with a custodian instead.

Hiring a custodian solves multiple problems for long/short funds even when not mandated by regulation. Investors tend to dislike the lack of transparency that accompanies hedge funds. They may also have concerns about the operational integrity and controls at each fund. When hedge fund clients ask to move into a separately managed account or a regulated structure, custodians can provide investors with a daily view into their holdings, risk profile and leverage. Custodians also provide a recognized and institutionalized level of operational efficiency for their clients. These important developments have contributed to increasing high net worth investorsʼ comfort with Liquid Alternatives and the growth of custodian services for long/short funds in general.

This report focuses on reporting, operational considerations and the cost of leverage as three main criteria for long/short funds to build a successful Service Level Agreement with their custodians. The report should assist long/short fund managers in partnering with custodians who are focused on and knowledgeable about the long/short fund business and who offer a collaborative approach with their clients. It may also provide insight into the cost pressures faced by service providers.

This report is part of the Finadium for Investors series, providing briefings and analysis to the asset owner and asset manager community.

Finadium subscribers with logins can log in to access this report.

For non-subscribers, more information on this report and subscription information is available on the Finadium reports home page.

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