Financial Institutions and Safekeeping Entities: Unanticipated Allies
In the rapidly evolving world of finance, hedge funds are forging new partnerships and operational models with global custodians to address industry challenges such as regulatory complexity, data management, operational efficiency, and the integration of digital assets.
Key trends in these partnerships include digitization and client lifecycle transformation, expansion into digital asset custody, leveraging AI and data platforms, outsourcing and acquisitions for operational scale, and a regulatory navigation and compliance focus.
Digitization and client lifecycle transformation see custodians partnering with hedge funds to digitize and streamline onboarding and client lifecycle processes, reducing friction and improving operational efficiency. This is demonstrated by a recent partnership aimed specifically at onboarding digitization as part of a wider client lifecycle transformation initiative.
The expansion into digital asset custody reflects the growing importance of crypto and DeFi. Hedge funds are collaborating with custodians who provide institutional-grade digital asset custody solutions. For example, State Street’s partnership with Taurus has been recognised for building a secure and scalable digital asset custody platform, aligned with regulatory frameworks and investor protection.
Leveraging AI and data platforms is another significant trend. Custodians are applying AI technologies to tasks like cash flow monitoring, fund prospectus interpretation, and data mapping within hedge fund servicing. Firms like J.P. Morgan invest heavily in data platforms such as Fusion, which provides clients APIs and cloud-based access to custody, fund accounting, and middle-office data, streamlining data management and enhancing operational efficiency.
Outsourcing and acquisitions for operational scale are also on the rise. There is momentum toward outsourcing fund operations to specialized custodians and fund administrators. Recent acquisitions and integrations, such as BNP Paribas absorbing HSBC’s hedge fund administration business and Carne Group’s acquisition of Mizuho Trust management company, illustrate how custodians are expanding their hedge fund servicing capabilities to meet growing client demands.
Given the evolving regulatory landscape, custodians are serving as partners to hedge funds to ensure compliance. This includes helping hedge funds manage regulatory uncertainty around digital assets, where clear treatment as securities or commodities remains unclear, offering custody solutions that align with compliance needs in a rapidly changing environment.
These partnerships and operational models enable hedge funds to better manage complex data, onboard investors efficiently, secure digital assets, scale operations through outsourcing, and stay compliant with evolving regulations, addressing the multifaceted challenges of the current industry landscape.
It is important to note that BNY Mellon's views expressed in this article may not reflect the views of the company. This article does not constitute investment advice or any other business, tax, or legal advice. All rights for this publication are reserved, and no part of it can be reproduced without written permission from the publisher, The Sortino Group.
The financial crisis led to a shift in focus for investors towards more stable returns and transparent governance. Custodians manage settlement risk closely, allowing hedge fund managers to trade without worrying about asset location. Global custodians have safety, stability, and transparency built into their DNA and can be as dynamic and flexible as prime brokers.
Institutional investors are forming strategic partnerships with global custodians to leverage technology in finance and business, focusing on digitizing client lifecycle processes, expanding digital asset custody, using AI and data platforms, and ensuring regulatory compliance. These partnerships aim to streamline onboarding, enhance operational efficiency, and manage complex data, all key factors in the rapidly evolving finance industry.
In their efforts to address industry challenges, these partnerships also seek to expand hedge fund servicing capabilities, outsource and acquire for operational scale, and provide secure and scalable digital asset custody solutions, reflecting the growing importance of crypto and DeFi.
