A restructuring of Citi’s hedge fund sales efforts will allow clients to leverage their business to obtain more services from the banking giant, according to Keith Gertsen, who joined Citi last year.
Gertsen, a 20-year-plus industry veteran, oversees Citi’s newly unified hedge fund sales offering, reporting to Patrick Curtin, Alan Pace and Jim O’Donnell. Gertsen joined Citi last year as a senior relationship manager working with clients across all asset classes.
Citi has two very distinct product offerings for hedge fund clients: global transaction services, which includes securities and fund services (SFS), and prime finance, which includes prime brokerage and capital introduction.
Previously, the two divisions had different sales teams targeting the same buyside clients, but now Gertsen heads up Americas sales for both prime finance and SFS.
"Historically, spending across products was not fully recognized, and this inefficiency was very much recognized by clients," said Gertsen. "I recognized that myself as a former client."
Prior to joining Citi, Gertsen was global head of trading at both Viking Capital and AllianceBernstein. Having looked at the business from different perspectives, he now sees the benefit of giving clients a single contact to get to know multiple aspects of their business.
Though the model might seem to be a logical one that could get copied elsewhere on the Street, Gertsen said few competitors have large operations in both administration and finance. Because Citi does, however, it can leverage the two different businesses to offer clients perks for choosing Citi.
Funds using Citi for administration, for instance, can have their dollar commitment for administration recognized in their markets business, giving them access to better resources.
Administration in particular is an expensive component of hedge fund services, and managers want to get additional benefit if they can. A fund doesn’t get anything extra for what it spends if it uses a third party without other capabilities, Gertsen said.
There has often been concern in the industry about having an administrator also be a fund’s prime broker, due to possible conflicts of interest. Citi avoids potential problems concerning a lack of independence by keeping the two businesses separate, Gertsen said. Citi’s fund administrator doesn’t reside within its prime brokerage, a fact that might comfort investors.
Citi only unified its two sales teams in the past few months, but so far the response has been strong, according to Gertsen.
"The clients that are focused on their wallet are the ones that we’re really trying to go after," Gertsen said. "They’re basically getting scale by purchasing across multiple products."
In the post-crisis world, counterparty risk is a big concern, and many funds went from using a couple of prime brokers to using as many as six or more. While that spreads out risk, it also means funds lose out on the purchasing power benefits of having a single main prime broker.
When funds thin out dollars across multiple primes, their spending can’t be leveraged into other product areas, Gertsen said. Some funds are looking to re-concentrate on a single prime broker, but that’s just starting to happen, he added.
Going back to fewer prime brokers won’t be easy, according to Art Murphy, vice president for hedge funds at services vendor Linedata. He said investors are insisting on multiple prime brokers, even when that makes little sense for small firms.
Bringing on a second prime broker–let alone a third or a fourth–can add unneeded complexity to a fund’s workflow, according to Murphy. Still, without multiple prime brokers, funds have difficulty raising money, so many funds get stuck with more primes than they actually need.
"It’s really up to the investor at this point," Murphy said. "If we can educate the investors to let them know there are other checks and balances, then I think you’ll see those numbers come back down."
In the meantime, both Gertsen and Murphy said there has been renewed interest in smaller hedge fund managers, provided they have a good pedigree and the proper infrastructure in place.
It used to be common thinking that funds with more than $10 billion were the net recipients of most of the new money coming into hedge funds, but now funds with $1 billion to $5 billion are seeing an increase in asset flows, Gertsen said.
That is perhaps a function of returns, as size tends to degrade performance in some strategies. But Gertsen added that there’s also more exclusivity around an investment in a smaller fund, where investors have more insight, more connectivity, and feel like they’re a more valued partner.
As for Citi, it wants to be a more valued partner with funds as well. Gertsen said by offering a comprehensive set of services for hedge funds, the company can ensure clients are able to maximize their wallet spend across all product areas.
