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Specialist Service Providers Offer a Real Alternative in the CTA Fund Market - September 2014

by Jack Ebbs

  • 22 Sep 2014
  • HF

Preqin’s Hedge Fund Analyst data reveals that after the Rothstein-KPMG merger, the ‘Big Four’ audit companies service 82% of all hedge funds and 67% of all CTA funds globally. This trend is also seen across other fund services in the industry where according to Preqin data, larger CTA managers tend to select more established fund services providers. For example, Goldman Sachs serves as the leading prime broker for CTA funds with at least $500mn in assets under management, and BNY Mellon is the most preferred custodian service provider for these larger CTAs. The industry is currently dominated by big investment banks and established mainstream providers who can cater to the scale and growth of larger funds, as well as provide the confidence of a major industry name. However, data from Preqin’s Hedge Fund Analyst shows that there are a number of lesser-known services providers within the CTA fund universe which have a significant presence, demonstrating that there are still opportunities for smaller and more specialized firms in this marketplace. 

According to Preqin data, smaller CTA fund managers tend to opt for specialized, niche service providers. For example, Arthur Bell, Certified Public Accountants is the leading auditor of CTA funds with less than $100mn in assets under management and with a 16% market share. It also ranks third in the overall CTA market, ahead of both Deloitte and PricewaterhouseCoopers, and audits over one quarter of all CTAs in the US market. Similarly, Preqin data shows that while Citco Fund Services is the most used fund administrator for the overall hedge fund industry, NAV Consulting is the top administrator of CTAs, servicing 16% overall and 27% of all US-based CTAs. It also services three times the amount of US-based CTAs than Citco Fund Services. 

Furthermore, CTA fund managers with smaller amounts of assets under management need service providers that match the complexity of their strategies, which more specialized, focused providers would be able to offer. For example, although Newedge Prime Brokerage Group does not feature in the overall top 20 industry providers, it services three times as many CTA funds as Goldman Sachs. Newedge Group is also the leading prime broker for funds managing up to $500mn in assets. Interactive Brokers is the most favoured custodian among CTA funds with $20mn or less in assets, servicing 10% of all funds. 

While smaller and more niche service providers have a strong foothold in the CTA industry, they tend to service smaller CTA funds. Managers of the larger CTAs tend to favour the more established names, opting for ‘Big Four’ auditors, major investment banks and more mainstream service providers. However, due to the added complexity of CTA structures and varying degrees of fund sizes, there is a need for specialist providers who can offer a more focused service to CTA fund managers.

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