Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Hedge Fund Administration

Hedge Fund Administration

Ratings: (0)|Views: 158|Likes:
Published by RD

More info:

Published by: RD on Aug 01, 2010
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less





These are halcyon times for the alternative invest-ment industry. While the attention rightly spotlightstalented fund managers and the institutionalinvestors who are sponsoring them, administratorshave seized the opportunity to assume a more inte-gral role in the investment process and haveparticipated enthusiastically in the ride.The primary reason for this development is theincreased focus on the integrity of the operationalinfrastructure of a fund, resulting in the search foran added-value fund administration service thatmeets their needs. Fund administrators see this asthe opportunity to create a service offering that isintegral to a hedge fund’s investment process.Unfortunately, however, for a variety of rea-sons, the quality delivered by such a world-classopportunity tends to be a mixed bag, with manyadministration mandates overselling rather thanproviding what a fund really needs. The resultcould be a match made in hell and the recipe for apainful separation.And, as fund administrators scramble toenhance their offering to meet the expectations of an increasingly complex and demanding market-place, the industry is fed a daily diet of fundadministration-related PR announcements thatinclude acquisitions, mergers, new mandates(never lost ones), new and enhanced services, linksto software platforms and increased capacity.Entrants into this space include niche players,hedge funds establishing their own outfits, andprime brokers and banks either buying or estab-lishing fund administration arms to maximisecross-selling opportunities.This all adds up to an impressive menu of choices for funds making the unenviable decisionas to who to select as their fund administrationpartner (more of partnerships later). Clearly, onesize does not fit all and the dialogue between fundmanager and administrator during the selectionprocess is of critical importance.How can funds avail themselves of the specialistswho work hard to provide dedicated, well-tailoredservice solutions? And what should the fund admin-istration community do to cement a more deservingreputation with somewhat suspicious fund man-agers and a needy investor community?
The six core pillars ofthe fundadministration process
The fundamental value proposition of the fundadministrator is their ability to process the fund’sactivities efficiently and seamlessly, to reportbreaks and P&L, and to provide investors withindependently prepared, accurate and timelyinformation. The related core processes comprise:investment transaction processing;reconciliations;portfolio pricing;fee computations;investor-related activities processing; andreporting.Everything else is an add-on. Given the complexnature of hedge funds, the administrator needs to
Hedge fund administration:The new paradigm – step up or step out
Spring 2007© HedgeFund Intelligence
William Keunen,director,Citco Fund Services
be able to demonstrate significant investment inpeople, process and technology to pull off theseseemingly basic requirements. Fund administratorswho lose sight of these core functions do so at theirperil, and risk doing their funds a grave disservice.Realistically, for the majority of funds, the man-agers must remain in control of their own destiny;with anything pre-trade, it’s their own responsibili-ty while all post-trade activities are mapped outbetween manager and administrator in the form of:Formal, documented procedures and hand-offsProvision for checks and balances by the admin-istrator of the fund manager AND vice versaService level agreementsRemedial provisionsFull and proper disclosure covering allresponsibilitiesWhere new funds are being established, it shouldbe relatively easy to establish an effective partner-ship (between manager and administrator) andform a proper operational infrastructure.But, for existing funds, it can be difficult to makea clean break from the status quo, where legacy prac-tices are often out-of-step with the modern hedgefund environment, where the bar has been raised bya more educated, demanding investor community.
Taking fund administration to the next level
In addition to the core functions, administrators areadding a suite of new services including front-endsystems, middle-office services, expanded valua-tions capabilities, treasury, collateral management,risk reporting and compliance services – to name afew. Whatever the offering, fund administration 101dictates that the market will determine what a fundadministrator does well, what they need to improveand finally what the gaps are in their offering.The key is to demonstrate that the administra-tion function adds value to both the investmentprocess and investor communications, at the levelthat suits a particular fund’s needs.
Selection ofthe fund administrator – threekey criteria
Even with such intense competition, the choice of an administrator remains tricky but, if the selectionprocess is handled properly, it should be rewarding.The fund manager should determine whichone of three approaches to adopt, always remem-bering that you get what you pay for:Build the infrastructure in-house (using propri-etary or third-party systems) supported byin-house operations and back-office teams – inwhich case the administrator typically supplies amore traditional suite of services.Partner with the administrator to provide a pre-defined suite of services that could includesystems and middle-office services.A mix of the above to suit the specific needs of the fund.
Rattling the cage or rattling the sabre
While the rationale for switching an administra-tor is usually perfectly valid, based for exampleon the desire to ramp up services, I am surprisedat how often conversion mandates are embraced(presumably because of the prospect of mouth-watering revenues) without first fully assessingthe nature of the operational hazards.Whenever we have been invited to participatein a tender for an existing fund, we have beeninclined to decline the opportunity unless we feltwe could provide an added-value solution that wasmeaningful in the context of the fund.It may be an over-simplification but, followingthe demise of one of the “big 5” accounting firms,the bar on their approach to managing their riskprofile seemed to be raised significantly. The limitsplaced on the activities of the remaining accountingfirms have, of course, been compounded by bothregulatory and governmental agencies with initia-tives such as
Sarbanes Oxley 
in the US. Unless thefund administration sector is prepared to set andmanage expectations more effectively and adhereto its responsibilities to provide checks and balancesmore robustly (rather than chase assets), the samecould happen to one of our own. After all, we canall congratulate ourselves on our growth record, butone bad fund can bring the entire empire down.In any event, regulators, investors, agencies andassociations (eg AIMA, IOSCO and MFA) areexerting an influence on how funds should operate,with the result that the meaningful money is onlybeing invested where there is a proper infrastructure.And, as developments in the industry proceedat a lightning pace, with managers and/or thefunds themselves now staging initial public offer-ings, the scrutiny on the role of each of a fund’scounterparties will naturally intensify and exposethose who are not up to the task.That is ultimately how self-regulation worksbest – either step up or step out.
Industry trends that impact fundadministration
While there were less mega-start-ups in 2006
    I    N    D    U    S    T    R    Y    C    O    N    C    E    R    N    S
    H    E    D    G    E    F    U    N    D    A    D    M    I    N    I    S    T    R    A    T    I    O    N
© HedgeFund IntelligenceSpring 2007

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->