State street turns hedge fund custodian

Date: Friday, February 13, 2009
Author: HFM Week.com

State Street is the latest custodian bank to receive a massive upswing in business from hedge funds desperate to avoid counterparty risk.

In response to industry demand, the Boston-based bank has informally added a custodial offering to its existing Alternative Investment Services unit and is planning to offer hedge funds custody banking, as well as administration services to clients.

“We’ve obviously had a long-standing custody operation, but it is safe to say that it is now providing services to a whole new constituency [hedge funds],” the bank’s Scott Fitzgerald told HFMWeek.

Another source, who has worked closely with State Street’s custody facility, said that a hedge fund service been successfully integrated with the bank’s US-hedge fund servicing business and would now be rolled out to the European market.

Following the collapse of Lehman Brothers, hedge funds have grown increasingly concerned about counterparty risk. Many have sought security for their cash assets with custody banks.

Last year HFMWeek revealed that the Bank of New York Mellon (BNY Mellon) had been able to boost its revenue stream in 2008, partly due to offering increased custody services to hedge funds, by 40%.

At the time, David Aldrich, the managing director of the bank’s Alternative Investment Services Division in Europe, told HFMWeek that it was positioning itself as an “agent of change” in hedge fund servicing.

HFMWeek has also exclusively revealed Morgan Stanley’s plans to ‘reshape’ its prime brokerage business to reflect the shrinking of the industry and the bank’s own recent loss of hedge fund revenues.

The bank is currently working on plans to open a new custody wing, designed to assure clients that it has mitigated some of the risks of rehypothecation. Other prime brokers, including Goldman Sachs, are believed to be considering a similar tack or the forging of joint ventures with custodian banks.