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What does a custodian do for alternative investment managers ?
Legacy mutual fund managers are likely accustomed to hearing about custody requirements driven by regulation , but what does a custodian do for alternative asset managers who are not experienced in hiring a qualified custodian ? Amy Small , who heads up UMB Institutional Custody , discusses .
The primary duty of a third-party custodian is loss prevention by safeguarding assets . All registered funds , even those with alternative strategies , are required by law to use a custodian , who ‘ sit between ’ the investment manager and the assets themselves , for everyone ’ s protection . Many unregistered alternative funds — such as hedge funds and limited partnerships — also use a custodian , often at the request of one or more large investors who want the strong controls provided by third-party oversight such as compliance with anti-money laundering ( AML ) requirements . Or , because the ancillary services provided by a custodian support efficiency in their cash management and investor onboarding efforts . The word “ custodian ” can be a bit confusing , especially in the context of alternative asset classes . The role I ’ m addressing here is different from the services a manager ’ s prime broker may provide . Private fund custody , in this case , refers to third-party oversight and processing services sometimes known as “ bank custody ” or “ institutional custody .” That said , like prime brokers , private fund custodians can provide a suite of services that complement the primary function . For prime brokers , sales and trading is the primary function , complemented by ancillary services such as financing . For institutional custodians , risk re-
Amy Small
duction is the primary function , complemented by services such as servicing and settling trades , managing overnight cash , providing real-time reporting on cash availability , enabling straight-through processing on cash movements , tax reporting , managing proxy and corporate actions , handling FX needs , segregating collateral , and registering and opening foreign accounts . Not surprisingly , these private fund custody services relate to either or both securities themselves or the cash transacted for them . That intersection of securities and cash is precisely a custodian ’ s domain — and where it applies rigorous controls to avoid mistakes and fraud .
Investor-related services Private fund custody services can extend even further to areas relating closely to the investor base of an alternative fund . These investor-related services can end up making a huge difference in managers ’ operational efficiency . One such area is online reporting , via an investor portal that allows investors self-service access to account information . Another investor-related area — one which we ’ ve seen significant interest — is help completing alternative investment subscription documents on a manager ’ s behalf . This can include completing the core offering documents as well as AML and KYC requirements for each investor .
Financing arrangements and more Although prime brokers are more associated with financing than custodians , managers should know the role private fund custodians can play in supporting their financing strategy . At UMB , for example , we work strategically with both our customers and their existing lenders to create tri-party collateral agreements . Bank custodians like UMB may also be able to support alternative managers even further throughout the investment lifecycle with traditional banking and escrow services , investor servicing and fund administration . Ultimately , our work as custodian is to keep all parties secure and provide the client service that helps managers run their businesses as efficiently as possible .
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