A closer look revealed a banal reality of which you may already be aware: the reason JPMorgan and most other fund administrators have offices in Luxembourg is that the country offers a "friendly" tax and regulatory environment that has drawn 1,500 hedge funds (with around $211 billion in assets under management) to set up shop there -- what Bermuda, the U.S. Virgin Islands and the Cayman Islands are to U.S. companies, Luxembourg is to European and Asian mutual funds and hedge funds. "Luxembourg has always been the largest center in the world for cross-country distribution of funds," says Elliott Brown, product manager of JPMorgan Hedge Fund Services. "If an investment manager has a fund they want to sell in multiple countries, be they in Europe, the U.S. or Asia, they've traditionally made Luxembourg the base for that. And once you have your fund based in Luxembourg, the country's rules require that it be serviced by people on the ground in Luxembourg." Thus Luxembourg has become one of the largest centers in the world not only for headquartering of investment funds but also for servicing those funds. JPMorgan is the largest provider of traditional fund services in Luxembourg – it services around $300 billion in assets for mutual funds.

What's new for JPMorgan is that it's building up a large hedge fund servicing business alongside its existing mutual fund servicing business. The firm already has 20 people in its Luxembourg office servicing 100 hedge funds. "The reason we've chosen to expand in Luxembourg is we have lot of demand from our clients, especially major institutional clients that have traditional funds there that are launching Luxembourg-based hedge funds," Brown says.

Scaling IT infrastructure out to Luxembourg has not been a problem for the hedge fund service unit, Brown says, because it's simply piggy-backing off of the mutual fund administration business JPMorgan has already set up there. Both groups use a global application suite that's a combination of external software and internally generated applications. The Luxembourg office is the first place JPMorgan is rolling out a new hedge fund of fund custody and workflow application that will be formally announced later. The new platform will enable JPMorgan to better control month-end transaction processing for fund of hedge funds.