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Hedge Fund Assets Available for Prime Custody Jump 40% in Two Years, Says BNY Mellon

Sep 12, 2012

Half of all hedge funds with $1 billion or more now have prime custody agreements in place

NEW YORK, September 12, 2012 — BNY Mellon, the global leader in investment management and investment services, reported today that hedge fund assets available for prime custody services now stand at an estimated $684 billion, a 40% increase since 2010.  The increase reflects both growth in overall hedge fund assets under management (AUM) as well as lower levels of borrowing from prime brokers. 

Roughly half of all hedge funds with more than $1 billion in AUM are now thought to have a prime custody agreement in place, up from 15% in 2008 as funds increasingly seek to mitigate counterparty risk.

'Prime custody' refers to the tailored servicing of unencumbered assets within alternative investment portfolios, performed by both prime brokers and custodians to provide greater transparency and risk mitigation.

Produced in conjunction with research and consulting firm Finadium LLC, the new report, "Prime Custody Comes into the Spotlight," outlines prime custody's growing importance to hedge funds and how global custodians are supporting this market.  The paper also analyzes the structural changes that are fueling growth, including an increase in fully paid/unencumbered assets – such as investments in financial products which themselves contain built-in leverage – and a heightened awareness among institutional investors of potential counterparty risk. 

"Hedge funds are putting far more emphasis on how they manage custody of their assets and increasingly looking to adopt best practices to ensure their counterparty risk profiles are optimized and meet investor requirements," said Marina Lewin, managing director at BNY Mellon's Alternative Investment Services business.  "BNY Mellon works in partnership with its extensive network of prime brokers, so clients maintain their current prime broker relationship but have the added benefit of holding their assets with an independent third-party custodian.

"This new paper highlights the significant growth in the prime custody market in recent years, and we expect the trend to continue," Lewin added.

BNY Mellon's prime custody platform enables hedge funds to move, manage and safekeep assets with maximum transparency, combining elements of custody with collateral management and liquidity services.  Assets are fully segregated and held outside the custodian's balance sheet, helping to address investor concerns regarding counterparty risk. BNY Mellon has alternative assets under administration and custody of more than $525 billion, including over $155 billion of prime custody assets.

The report can be found at: http://www.bnymellon.com/foresight/pdf/primecustody-0812.pdf

Finadium is a research and consulting firm focused on financial markets. In its research practice, the firm assists asset owners, custodians, hedge funds and technology firms with understanding the market for financing and asset services and in maximizing the effectiveness of their resources. Finadium research is available on a subscription basis. Finadium also conducts consulting assignments in financing and asset services for plan sponsors, mutual funds and service providers in the financial markets industry. For additional information please visit www.finadium.com.

BNY Mellon is a leading administrator of alternative assets, including single manager hedge funds, funds of hedge funds, and private equity, with more than $525 billion of alternative assets under administration and custody and an extensive global presence. BNY Mellon also offers a wide range of cash management, foreign exchange, collateral management, corporate trust, and wealth management services to the alternative investment industry.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $27.1 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.5 trillion in outstanding debt, and processes global payments averaging $1.4 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Learn more at www.bnymellon.com or follow us on Twitter@BNYMellon.