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-offs•Provision for checks and balances by the admin-istrator of the fund manager AND vice versa•Service level agreements•Remedial provisions•Full 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
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