BNY Mellon’s Fund Of Funds Administration Business Shows Its Strength

The hedge fund-focused publication HFMWeek, recently adjudged Bank of New York Mellon (NYSE:BK) to be the largest administrator of fund of hedge funds (FoHF) in the world. ^[1] The world’s largest custody bank topped the list of FoHF administrators in HFMWeek’s biannual survey of 63 fund administrators, with $133.4 billion in assets under administration (AUA) from FoHFs at the end of April 2013. This represents a healthy 2% growth in AUA figures over the six month period since the last set of figures captured by the survey at the end of October 2012 – in line with the growth in overall assets for global FOHFs.

BNY Mellon’s leadership position in the industry is a strong positive for the global custodian, as the asset servicing solutions it provides its fund of hedge fund clients attract higher fee revenues compared to most of its institutional clients, due to the underlying complexity of the service involved. As we had pointed out in a recent article about the bank’s competitor State Street (NYSE:STT), custodians stand to benefit from increased complexity in the financial industry as more and more funds would look to outsource various day-to-day activities, to be able to focus on their primary goal of generating returns.

We maintain a $28 price estimate for BNY Mellon’s stock which is around current market prices.

See our full analysis for BNY Mellon here

A custody bank makes money by providing services to institutions for safekeeping their assets. In the process, it also generates fee revenues through other related services like taking care of accounting, back-office and middle-office activities. Needless to say, a custody bank’s top line growth is directly linked to growth in the size of its assets under custody, as new customers bring in more assets on which it can charge a fee.

BNY Mellon boasts of $26.3 trillion in assets under custody and administration, of which assets worth around $600 billion come from alternative investment funds. The fund of hedge funds (FoHFs) fall under this category, and while BNY Mellon’s $133.4 billion in FoHF assets represent a fraction of the custodian’s total assets, this figure is a sizable chunk (almost 25%) of its alternative fund assets.

BNY Mellon’s strong presence in the industry is only exemplified by the fact that FoHFs had a total of $1.1 trillion in assets at the end of April, which means that the bank services nearly one-eighth of all assets in the industry. ^[2] And although the FoHFs have seen a steady outflow of funds over the recent years, the outlook looks bright with most of them realigning themselves better with market conditions in the recent past. ^[3]

BNY Mellon can hence expect continued growth in its asset base from FoHFs in the time to come, which will in turn help the bank’s servicing fee revenues as represented in the chart below.

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1. Exclusive: BNY Mellon Maintains FoHF admin lead, HFMWeek, Jun 13 2013 [↩]
2. BNY Mellon Largest FoF Admin., FINAlternatives, Jun 19 2013 [↩]
3. FoHFs begin recovery, Risk.Net, May 28 2013 [↩]