State Street’s $550 million acquisition of Goldman Sachs Administration Services (GSAS) will create one of the world’s biggest hedge fund administrators and close the gap in Asia on market leader HSBC.
State Street is expected to take on GSAS’s 150 hedge fund clients and 250 staff globally, with the merged entity overseeing $900 billion in alternative assets. Goldman’s prime-broking business is not included in the deal.
“Goldman Sachs has been looking to spin off its fund administration arm for a while,” says Alexander Mearns, chief executive of data provider Eurekahedge. “While fund administration can be a useful addition to a portfolio of hedge fund services, it is a low-margin business and certainly far less profitable than prime broking.”
Goldman’s prime brokerage arm is the global market leader with a 17% market share, according to Eurekahedge figures released this week. However, GSAS is lowest in the top 10 of administrators with 2.4% of the global hedge fund admin market, while State Street ranks second with 8.41%.
Their combined market share of 10.81% would put the merged entity just behind global hedge fund admin firm Citco, which has 12.91%.
In Asia, the merger would cement GSAS's position as the second-largest player after long-time market leader HSBC. According to AsiaHedge statistics released last month, HSBC has a comfortable lead, by both assets under administration ($24.8 billion) and number of funds (133). GSAS is second in the region by AUA ($18.2 billion) and sixth by number of funds (28), with State Street sixth by AUA ($3.5 billion) and 11th by number of funds (17).
Combining the two would therefore create an entity overseeing $21.7 billion across 45 funds in Asia, bringing it closer to HSBC by AUA.
GSAS is just one of many alternative fund service providers that custodian bank State Street has acquired over the past decade. It launched hedge fund services in Asia last year, with an eye on capturing a larger share of the growing alternatives administration sector.
However, Goldman’s move to offload its fund admin arm counters a trend in the hedge fund services industry, which has seen large banks roll out an expanded suite of offerings.
HSBC and JP Morgan, for example, have been setting up prime-broking operations in Asia. And Deutsche Bank last year launched hedge fund admin services with the intention of leveraging its market strength in prime brokerage.
While hedge fund administration is not a lucrative business in itself, banks are using it as a means of increasing the uptake of higher-margin securities lending, margin lending and derivative sales, among other services.
However, while large hedge funds may have three prime brokerages, smaller strategies might have only one. Given heightened post-crisis concerns over counterparty risk, it may be that smaller hedge funds prefer to choose a prime brokerage and administrator that do not share a roof.
At the end of 2011, 42% of Asia’s hedge funds managed less than $20 million, Eurekahedge figures indicate. Additionally, the US is seeing a trend of large hedge funds paring down the number of prime brokerages they use in a bid to cut costs.
By spinning off GSAS, Goldman avoids “the messy conflict of interest issues plaguing banks that service funds with both prime-broking and admin functions”, says Mearns.
Goldman Sachs declined to comment on the implications for its hedge fund admin clients in Asia, with a spokeswoman noting that the deal is at an early stage and still subject to regulatory approvals.
State Street says it expects the deal to be finalised in the fourth quarter, pending regulatory approvals.