Bank of New York Mellon Servicing 130-30s; Pershing Subsidiary Reenters Prime Brokerage
November 19, 2007
A new service from Bank of New York Mellon Corp. and Pershing Prime Services, a recently created division of the bank's clearing subsidiary, will allow 130-30 funds--and those with similar strategies--to use Pershing for prime brokerage and Bank of New York Mellon for custody, collateral management, administration and accounting services. It's an approach that closes the historic divide between the two types of service providers.
The 130-30 market could reach $1 trillion in the next five years, according to industry estimates. Pension funds, who see 130-30 funds as a way to obtain higher returns while avoiding the fees and risks associated with hedge funds, are the biggest customers of the strategies, accounting for a majority of the $75 billion market.
Steve Deutsch, director at fund research firm Morningstar, said that most of the 130-30 vehicles have been created since 2006 and this year "it has really started to pick up. The question now is which money manager is not offering 130-30-type products."
The new Bank of New York Mellon solution allows funds that are registered under the Investment Advisers Act of 1940, "as well as other limited partnerships, managed accounts and hedge funds, to keep their short positions with Pershing while maintaining their long positions with the Bank of New York Mellon," said Jeremy Todd, director of Pershing Prime Services.
The service will give fund managers greater operational efficiency and, in eliminating the need for separate service providers, reduces fees. "There are sometimes disputes between service providers over who is responsible for errors," which won't occur with a single provider, said Todd. Funds can also "negotiate lower fees based on their volume of business."
Though fund managers will have to sign agreements with both Pershing and Bank of New York Mellon, the contract negotiations will have a shorter time to market--as little as a few days--compared to several months for separate service providers.
The Prime Services unit marks Pershing's return to prime brokerage. When the former BNY in 2003 acquired the clearer, its previous owner Credit Suisse First Boston retained most of the prime brokerage clients; Pershing carried over a few, but only for clearing and settlement. The new unit, led by managing director Craig Messinger, will provide customers with a full range of front-, middle- and back-office services including securities lending, margin servicing, clearance and settlement, collateral management and risk management.
Pershing is installing a data warehouse and hub from Netik, a software firm majority owned by Bank of New York Mellon, for hedge fund clients wishing to use its prime brokerage services. Netik InterView is already used by the bank's fund administration outsourcing and hedge fund administration units.
While a number of prime brokers have dedicated 130-30 desks, Bank of New York Mellon claims that it is the first to offer prime brokerage and custody under one roof.
In targeting new business, Pershing Prime Services will compete head on with prime brokers for hedge fund clients, while attempting to gain business from traditional fund managers moving into the "short-extension" space who are using Bank of New York Mellon as their custodian. Such clients might also use other prime brokers.
So far, according to Todd, about a dozen funds are using or have committed to use Prime Services, including traditional long funds that are expanding into the 130-30 area. Bank of New York Mellon Asset Management, which has several 130-30 funds, is investigating whether there are legal constraints that would prevent it from using the integrated offering.
