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Published on Hedgeweek (http://www.hedgeweek.com)

Thu, 10/09/2015

Convergence has released the Q2 update of the State of the Union of the Alternative Asset Management Industry. The report focuses on business trends among alternative asset managers, related assessments of changes in operating complexity and risk, and changes in operating productivity.

The data is sourced from SEC filings and enriched to provide a unique view into the infrastructure of over 15,000 RIA’s. There were over 5,600 individual Advisor filings in Q2 2015.

According to the report:

• Advisor complexity increased given the 31 factors tracked
• The Complexity Index increased 7 per cent driven by a variety of factors
• Industry growth – the manager universe advising alternatives grew 23 per cent
• Total headcount surpassed 75k, or a 5.7 per cent increase from Q2 2014 – with the biggest increase being in non-investment professional headcount
• The Regulatory environment continues to grow and intensify with the number of Regulators by Advisor growing 23 per cent
• Administration consolidation continues at both ends of the market
• Operating productivity declined modestly at Advisors suggesting a greater usage of technology and outsourcing.

“The key to our data set is the completeness and structure as well as the independent sourcing and the time series element,” says John Phinney, Co-President of Convergence. “Convergence will continue to monitor this ever changing industry providing empirical data, fuelled research, and observations,” adds George Evans (pictured), Co-President of Convergence.

Convergence’s State of the Union report and insight allows managers and advisors to put increased focus on defining their current operating metrics, establish clear operations-related objectives, and see a clearer path to a company’s growth plans.

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SOUTH NORWALK, CT (PRWEB) FEBRUARY 14, 2017

Convergence, a financial technology company founded by industry veterans, has launched Advisor Complexity Profile (“Complexity”), a new service designed to address the challenge of operational and business model transparency in the alternative asset management industry, it was announced today.

Complexity provides insight into all the major alternative asset classes, including hedge funds, private equity, real estate, venture capital, and structured asset funds, incorporating approximately 8,300 managers in more than 50 countries, and assigns each of them a high, medium or low complexity profile. It is designed to meet the needs for improved transparency and analysis for all the major industry participants: investors and asset allocators, assets managers, and service providers.

“The digital footprint being created by thousands of asset managers continues to expand making it harder to identify the critical data points that can provide insight into operational due diligence and risk management. Until now there has been no unifying product to capture, normalize and structure the kind of information that can give users an insightful and timely view into the complexity of an asset manager’s business model,” said John Phinney, Chairman & Co-President at Convergence. “Complexity Profiling does just that, allowing asset managers and asset owners to proactively protect against risks that may have previously gone undiscovered in a manager’s operating model.”

Complexity captures approximately 2,000 data points per manager, allowing Convergence and its clients to objectively compare manager complexity over time using a consistent set of metrics to track change and identify potential issues. Proprietary algorithms are used to create a “Complexity Profile” based on 40+ un-weighted factors identified in the manager’s business model. Profiles are updated daily.

A low/medium/high complexity profile is assigned to the asset manager based on the number of high complexity factors present in their business model. Among the factors captured and analyzed are internal valuation, self-administration, and qualified audits. Asset managers would be expected to have the infrastructure in place to manage the level of complexity inherent across their organization.

Complexity Profiles are designed to be used for a variety of purposes including fund raising, manager research and selection; ongoing surveillance and due diligence; pricing services and assessing risk, benchmarking versus peers and competitors, and in sales support. Complexity Profiles allow users to pinpoint specific complexity areas where risk exists and where risks have been created since the initial due diligence was conducted.

“Complex operating models do add risk, and unnecessarily complex models can add unnecessary risk,” said George Evans, Co-President at Convergence, noting that Convergence estimates that as many as seven percent of asset managers may be under major operating model stress at any given point.

“These potential issues have historically been invisible to investors and allocators. With Complexity, we are bringing unconstrained transparency to the operating risk in each manager’s structure and in the industry overall, while also allowing managers to gauge the complexity of their own businesses,” he added.

Convergence founders Phinney and Evans bring a long track record of financial industry success to the new company. Prior to starting Convergence, Mr. Phinney held a number of senior positions, including CFO/COO with Apollo Global Management, The Rohatyn Group and JPMorgan.

Mr. Evans was previously Managing Director with The Gladstone Group, and Global Head of Business Development with GlobeOp Financial, BISYS and JPMorgan Investor Services.

Convergence currently counts among its users many leading fund administrators and auditors, pensions, endowments and foundations, as well as large established and emerging asset managers. With Complexity, it is targeting a market comprised of more than 17,000 registered investment advisors, 58,000 alternative funds, and an expected $20 trillion in assets by year-end 2020.

“If you’re an asset manager, you want to know where you have issues compared to your peer groups that might be costing you business. If you’re an allocator, you want to identify the best managers, and flag any potential issues early in the process. For a service provider, there’s a need to identify where to market your products and price them accordingly. Our research and analytics are designed to provide insight for all these constituencies,” said Phinney.

About Convergence, Inc.

Founded in 2013, Convergence is an independent growth company that has created an entirely new platform comprising (1) data, (2) research and analytical products, and, (3) surveillance / monitoring services, all providing transparency into the infrastructure of the alternative asset management industry. The firm’s leadership team has 120+ years of experience managing operating risk in many of the world’s leading asset management organizations. The depth and breadth of this industry expertise differentiates Convergence from any research players in the industry who provide data but fail to provide actionable context. Convergence does not render investment advice.

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Original article seen here by Sam Macdonald
HFMWeek data has revealed the scale of the asset leakage from Citi’s hedge fund admin before it was sold to SS&C.
The latest HFM AuA survey, covering the six-month period between October and April, shows that only $135bn of single-manager assets have been added to SS&C’s book of business since the Citi transaction closed earlier this year.
Citi put the admin business up for sale at the start of 2015 and the last available AuA figures, from October 2014, suggested it had $326bn of single-manager assets.
SS&C has told HFMWeek that $100bn of hedge fund AuA was in fact retained by Citi, something not publicised as part of the deal.
HFMWeek understands that Citi has retained a number of marquee hedge fund admin clients due to them having multiple ongoing servicing relationships with the bank.  Citi has refused to confirm the figure or comment on the matter.
Despite the retained assets there is still a gap of nearly $100bn between the single manager hedge fund AUA reported in October 2014 and the increase in SS&C’s assets since the deal closed.
FoHF assets appear to have been much more sticky, with $40bn of assets added to SS&C over the six-month period. Citi recorded FoHF assets of $56bn in October 2014.
SS&C announced in August last year that it had struck a $425m deal to buy Citi’s hedge fund and private equity administration units, although when the acquisition completed seven months later the price had fallen to $321m.
Citi’s decision to publicly state that its hedge fund business was up for sale in January 2015 led to a rush of competitors attempting to profit from the disruption by poaching business.
SS&C suggests that the majority of the leakage occurred before its deal to acquire the admin book was announced last summer.
“We believe since the announcement of our acquisition [on 18 August] that there has been very little attrition in either the hedge fund or private equity fund administration business,” said an SS&C spokesman.
“Citi retained several large asset managers and they were not included in the scope of the transaction.
“In addition, a handful of clients decided to move to other administrators prior to SS&C closing on the transaction.”
One high-profile departure from Citi’s admin came when Man Group decided to move a significant part of its $17bn AHL admin business to BNY Mellon, as revealed by HFMWeek this March.
It is understood Man wanted to use a bank-owned admin.
Consultancy firm Convergence says that in most cases, hedge funds themselves initiated a move rather than being removed by Citi.
“While we cannot determine whether the changes were initiated by the buyer or adviser, Convergence data suggests that perhaps as much as $105bn of the changes were prompted by the administrator. Convergence bases its observation on the size of the funds that were switched,” says Convergence co-president John Phinney.
According to the AuA Survey, total hedge fund assets fell around -6% to $4.7trn over six months, down from $5.0trn at the end of October.”

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Alternative Asset Managers Convergence Insights Twelve Months Ended September 30, 2015

Q3 2015 Industry Headline-Alternatives Continue to Grow!
The number of alternative asset managers primarily advising private funds in our database grew 15% to 4,824 from 4,186. Manager growth was driven by new Managers coming into the market, including previously unregistered managers who registered, and existing registered Managers whose private fund assets under management exceed 50% of their total Regulatory Assets under Management.
The business complexity2 of the alternative asset manager industry in our universe on September 30, 2014 increased despite challenging and turbulent markets. The increase in business complexity was accompanied by material increases to staffing levels. The increase in non-investment headcount (middle-back office) is somewhat at odds with the trend toward outsourcing less core infrastructure. Perhaps Managers see many distinct choices and varying scope of services and technology solutions that make ‘Best Service Provider Fit” hard to discern.
Source of Convergence’s Insights
Convergence’s Q3 2015 insights are drawn from data we source from 16,000+ Form ADV and Brochure filings made by Registered Investment Advisors. ADV data from Advisors in business on 9/30/14 is our baseline and is updated during the year. In Q3 2015, 5,300 Advisors updated their Form ADV with 50% of this number is attributed to alternative asset managers. Our analytical approach allows us to follow alternative managers that have been in business for a full year and present an empirical view on how they are growing and changing.
Complexity drives work, cost and risk. Convergence tracks 31 Complexity Factors to develop various insights into how Managers manage capacity, infrastructure and meet new Regulatory and Investor requirements. With our Research, Analytics, Complexity, Benchmarking and Surveillance Tools, Managers, Service Providers and Institutional Investors can examine trends, peer and competitor intelligence empirically designed to build optimal infrastructure, select best fit vendors and enhance the overall Manager Due Diligence process.

Growth in our Universe of Alternative Managers

Convergence Insights
“The number of Alternative Asset Managers and assets will continue to grow as investors seek better returns and from asset classes less correlated with traditional equity and fixed income markets.”
Alternative Managers in our universe grew 15% to 4,824 and reported increases of 15% and 6%, respectively, in the amount of Regulatory and Private Fund Assets under Management3. The number of alternative private funds advised by Managers in business on September 30, 2014 grew 3% to 28,807.
Alternative Asset Managers also augmented the breadth of investment strategies and fund structures they advise, with 2.2% experiencing a re-classification by Convergence of their Primary Investment Strategy4 and 2.3% experiencing a re-classification of their Primary Fund Type 5 . Changes to a Manager’s primary investment strategy occur when they add new funds with strategies different than their legacy funds. Changes to a Manager’s primary fund type occur when the new funds they add are set-up in a different fund structure. For example, if a Manager launches a new debt fund in a closed-end private equity fund type whose total assets exceed the assets in their legacy debt funds that were set-up as hedge funds, their primary fund type would now be referred to as private equity while their strategy remained debt.

Leadership and Staffing

Convergence Insights
“Alternative Asset Managers cannot avoid hiring more middle and back office professionals to support increased business complexity and greater regulatory and investor requirements.”
Total headcount reported by Managers grew 11% to 80,728. This growth in staff reflects the growth in funds advised, the broadening of fund structures to capture new distribution channels and the management of increased business complexity. The number of Investment Professionals grew 9% to 39,889 representing 49% of alternative industry staff. This growth rate was outpaced by that of Non-Investment Professionals, which grew at a rate of 13% to 40,816, despite the fact that a large percentage of the middle and back-office operations are outsourced to third party service providers. Convergence believes complexity drives staff levels and that differences we see between complexity and headcount levels are based on the Manager’s culture and choice of service provider and their culture. Using an estimated all-in cost of 187.5k for a fulltime hire in the industry, we estimate that industry-wide personnel cost increased by 1.5bn per annum. All-in cost includes compensation and allocated overheads per person.
Q3 2015 represents the second consecutive quarter where the number of non-investment staff exceeded investment staff. This confirms Convergence’s view that non-investment hiring remains strong and is driven by complexity and regulation. Opportunities exist for Managers to work with Service Providers to efficiently manage growth by outsourcing the activities giving rise to non-investment hiring.

Business Complexity and Risk

Convergence Insights
“Complexity is here to stay-Managers must embrace and manage complexity to meet the return expectations of clients and limit operational and financial risks or lose business to alternative managers who have the scale to take on and manage additional complexity.”
Convergence’s alternative asset manager Complexity Index is a composite value of complexity factors that represents complexity and risk. The “Index” increased to 36.90, or 8%, from 34.21. The increase in complexity was driven by growth in affiliates, wrap fee programs, regulators, limited partners, total funds, private funds and public funds, and offset slightly by a decline in the Service Provider Index.

Industry Regulation

Convergence Insights
“60% or more of alternative asset managers in our universe may face significant financial liabilities because of unclear expense disclosures and practices, referred to by the SEC in recent actions as deceptive or misleading.”
As expected, the regulatory environment continues to grow and intensify. The average number of regulators disclosed per Manager grew 23% to 3.93 versus 3.19. This increased level of regulation largely stems from new jurisdictions where business is being conducted and is consistent with the changes we see in fund types and strategies. Additionally, the number of regulators has a strong correlation to the number of regulatory citations disclosed by Managers. Regulatory Citations reported by our manager universe grew 30% from 230 to 290.
All alternative asset managers should pay close attention to the growing number of SEC actions taken against small and large alternative asset managers for “misleading or deceptive” expense allocations for the simple reason that 60% of alternative asset managers in our universe have similar expense disclosure challenges.

Service Providers

Convergence Insights
”Regardless of the high concentration of market share across the Top 10 in each Service Provider Segment, there are simply too many firms servicing Managers which robs each of the financial scale needed to reduce systemic costs and reinvest in their business. Universal Banks will continue to shed businesses that do not generate enterprise value and/or cover increasing capital requirements-Convergence sees movement suggesting some big deals are in the making and sees smaller more nimble Service Providers gaining momentum!”
The Convergence Service Provider Index, defined as the sum of service providers used by Managers increased 1.2% to 7.95 driven by increases to

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