Management October 15, 2010, 4:11PM EST

HedgeServ: Challenging the Status Quo

Jim Kelly talks about how the fund administrator creates a "no-politics culture," why it doesn't outsource, and the fallout from Bernie Madoff

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Jim Kelly is not afraid to challenge the status quo. He first did so in 1995 when he launched International Fund Services (IFS), a fund administrator that soon became a leader in the field. The firm's model of daily processes, middle office support, and timely and accurate Net Asset Values (NAVs) set a new standard in the industry.

By 2005, Kelly and his team realized that fund managers needed more from their administrators—what was missing was real-time access to their data. "There was a gap between the service requirements of hedge funds and what administrators could provide because they were all sitting on legacy technology platforms," he says. "No one was investing in new technology that was answering the needs of portfolio managers in need of data. Instead they were spending money on maintaining old systems."

So in 2007, Kelly joined industry veterans Bob Aaron and Gene Mannella to launch HedgeServ, a fund administrator that offers hedge fund managers real-time access to their data through a current "shared technology platform."

He recently spoke with Businessweek.com Management Editor Patricia O'Connell about the team he has assembled and his second act in the fund administration business. Edited excerpts of their conversation follow.

Patricia O'Connell: Are the barriers to growth in the hedge fund services industry different now than they were when you started IFS?

Jim Kelly: Yes. When we started IFS, there really wasn't a viable model for where the industry was at the time. We came out with daily processes and middle office services. This became the standard because it was what hedge fund managers needed.

These days, it's important that we demonstrate the strength of our platform to managers and investors. It used to be the guy who had the best model got hired. But after Madoff, investors started looking at who was marking the books. They wanted a name they recognized. It was a game-changer. Now we are selling to the investors and due-diligence folks as well as the managers. We have had some major wins and we are getting good traction with investors.

You don't outsource any work to India—or anyplace else. Could you talk a little bit about the thinking behind that?

We will keep our operations in the U.S., the Cayman Islands, and Ireland because these business centers operate in the time zones most important to our clients. By not outsourcing, we also reinforce and preserve our culture of excellence. All of this is important when your staff is client-facing.

I have operated in Ireland for over 15 years and I know where the good schools are, I know where the well-qualified graduates come from, I know how to recruit them, and so we get them in and we've created a great culture and good energy. You have to recruit, hire, then you have to train, manage, incentivize.

What about the cost factor of not choosing to outsource to, say, India?

While it may be marginally more expensive to operate in Ireland than, say, India, the most important thing for us is to deliver excellence. Our clients would rather have better performance than save a small amount of money. The consequences of not having excellence on the service side can be very high. Philosophically, I don't believe in the lowest cost of production—I believe in excellence.

You seem very proud of the culture you say HedgeServ has created. What characterizes that culture?

We try to hire the best candidates and that creates a culture of excellence within the firm. When you hire people who have worked very hard to achieve, to be at the top of their class, and you create a community of people like that, you've got good energy. Our philosophy is that everybody has to act as a manager and you have to support the person next to you. So you're creating an environment of excellence and support. We try to discourage politics within the organization.