Alternative investment custodians play a crucial role in safeguarding assets for hedge funds, private equity funds, real estate funds and other alternative investment vehicles. As alternative investments become increasingly popular, understanding the functions of custodians is essential for both fund managers and investors. This article provides an overview of alternative investment custodians, their key responsibilities, and factors to consider when selecting a custodian.
Safekeeping of Assets is a Core Function of Alternative Investment Custodians
The most fundamental role of an alternative investment custodian is to hold ownership of a fund’s securities and cash on behalf of the fund. By keeping assets in segregated custodial accounts, custodians ensure proper safekeeping and prevent commingling of assets between the fund manager’s accounts and investor accounts. Leading custodians like BNY Mellon and State Street provide secure storage of financial instruments through state-of-the-art vaults and systems. Utilizing established custodians to hold fund assets also signals to investors that proper checks and balances are in place to mitigate misappropriation risk.
Custodians Handle Administrative Tasks and Reporting for Alternative Investment Funds
In addition to asset safekeeping, alternative investment custodians also take care of critical administrative and reporting duties like: processing subscriptions and redemptions; valuing fund assets and calculating net asset value (NAV); income collection and corporate action processing; trade reconciliation; record-keeping and accounting; regulatory reporting. By offloading these operationally intensive tasks to seasoned custodians, fund managers can focus on investment decision making. Moreover, investors take comfort knowing that fund NAV calculations and record-keeping are being handled by reputable third-party custodians rather than the fund manager alone.
Custodian Selection Factors Include Service Scope, Technology and Fund Specialization
Choosing the right alternative investment custodian is a strategically important decision for fund managers. Key selection criteria include:
– Service scope: Can the custodian handle all expected fund asset classes, structures and jurisdictions? What portion of custody is handled in-house vs. outsourced?
– Technology infrastructure: Does the custodian offer advanced digital reporting and analytics tools? How flexible and scalable is its technology platform?
– Fund specialization: How deep is the custodian’s experience with the target fund strategy (e.g. hedge fund, PE, real estate)? Do they understand the fund’s unique needs?
– Client service model: Is the relationship management model centralized or decentralized? How responsive and solution-oriented are their client service teams?
By aligning with top-tier global custodians who check these boxes, alternative investment managers put themselves in a strong position to meet rising investor expectations and focus on investment performance.
Leading Alternative Investment Custodians Enhance Credibility and Operational Quality
As competition for institutional and high-net-worth capital intensifies in the alternatives sector, fund managers need every edge they can get to stand out. Partnering with premium brands like BNY Mellon, JPMorgan, Northern Trust or State Street as the fund’s custodian lends credibility and provides a seal of approval that inspires investor confidence. These banking giants have proven track records of operational excellence and financial stability spanning decades. Fund managers can leverage their sterling reputations and ironclad balance sheets to validate the institutional quality of their investment process, risk management and governance.
In summary, alternative investment custodians play indispensable roles as asset keepers, administrators, and reputational enhancers. Astute fund managers choose their custodians carefully to bolster credibility with investors and fortify operational foundations so that they can concentrate fully on investment decision-making. Top global custodians like BNY Mellon, JPMorgan and State Street combine cutting-edge technology with unparalleled financial strength to meet the evolving needs of diverse alternative investment strategies.