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Independent Fund Administration in the Post Madoff Era uploaded by Anric Blatt

Independent Fund Administration in the Post Madoff Era uploaded by Anric Blatt

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Published by Anric Blatt
Anric Blatt, Lauralouise Duffy, Investing in Agriculture, Investing in Water, Investing in Natural Resources, Global Fund Exchange, Hedge Funds
Anric Blatt, Lauralouise Duffy, Investing in Agriculture, Investing in Water, Investing in Natural Resources, Global Fund Exchange, Hedge Funds

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Published by: Anric Blatt on Mar 02, 2011
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07/10/2011

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Independent third party und accounting andadministration has been pushed to the oreronto investor thinking in light o the Mado andother recently publicized investment scandals.The current push is being driven primarily by de-mand, both by institutional and individual inves-tors, and also by und managers attempting tobe proactive in implementing what many wouldconsider “best practices” in the operational areao their und(s) and trying to be ahead o thecurve as increased regulation appears certain.This drive to outsource the accounting andadministration unctions brings with it manychallenges and responsibilities. In addition tosatisying investor demand or independent thirdparty accounting, there are many reasons whya  rm would outsource. Bene ts may includereducing the costs o an internal accountingteam, avoiding large investments in technol-ogy and IT inrastructure, keeping ocused onmanagement’s core competencies (investmentselection, portolio management, raising capi-tal), reduction o errors, timely and qualitativereporting, and obtaining a marketing advan-tage, to name a ew. A higher level o comort isachieved when und activity, portolio holdings,subscriptions/redemptions, and account bal-ances are being reconciled to prime brokers andcustodians on a daily basis by an independentthird party. Common procedures now beingperormed by administrators include pricing theportolios daily, using independent third partypricing vendors, and reconciling the value oeach security and the portolio in aggregate tothe prime broker/custodian (or to alternativepricing sources), and computing and communi-cating daily perormance and attribution data.Investors are also demanding greatertransparency and access to und inorma-tion as well as timely reporting o investorbalances. Access to inormation is one othe main drivers behind the growth o se-cure investor portals being oered by manyadministrators, whereby investors log on tosecure websites and, with a user name andpassword, obtain access to their capitalstatements, perormance data and, in somecases, und holdings.Once the decision to outsource has beenmade, the next logical question is: How doyou choose an administrator? While reer-ences and reputation carry some weight,your due diligence should include visitingthe o ces o the administrator, meetingand interviewing the team, understandingtheir service model and technological capa-bilities, and getting a eel or the quali ca-tions and experience o the team memberswho will actually be perorming the work ona daily basis. Make sure they have the req-uisite skills to understand the instrumentstraded by the und, the technology in placeto e ciently process and store the transac-tions, and the ability to provide scalabilityas the und grows, other strategies areimplemented, and additional prime brokersor custodians are used. There should alsobe a process in place or continued educa-tion or training programs so the team isup-to-date on recent accounting and regu-latory changes aecting the industry. Outmost importance to many und managersis the timely delivery o reports, includingperormance reports, monthly NAVs and
Considerations and Trends for IndependentInvestment Fund Administration in thePost-Madoff Era
By Anthony Deliso
July 2009
In this Issue
Considerations and Trends forIndependent Investment FundAdministration in thePost-Madoff EraBy: Anthony DelisoCarried Interest UpdateBy: Fran Vallone
Eisner LLPAccountants andAdvisorsIndependentMember ofBaker TillyInternationalwww.eisnerllp.com
A publication from the Financial Services Group
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CONTINUED ON PAGE 2
 
investor capital statements. A ull-service administratorshould also have the skills, in-house, to prepare the dratnancial statements or the auditors and liaise with theaudit rm so that the audit is conducted eciently andtimely. Other value-added services may include the abil-ity to prepare the tax allocations and, in the most ecientenvironment, the tax returns and K-1s as well.A thorough understanding o onshore and oshore undstructures, ee calculations, hurdles, redemption poli-cies, gates, accounting rules, side pockets, and valuationpolicies, as well as the ability to interpret and adhere tothe unds’ legal documents, are additional examples owhat to look or in an administrator. The administratorcan also be a valuable source o input when structuringor updating the und’s private placement memorandumand limited partnership agreement, since they oten seemany variations o these documents written by variouslaw rms.Increased regulation will surely bring with it the need orbetter organization, document retention and storage,and more transparency o investment strategy, posi-tions, ees and compensation--requiring state o the art,fexible, customizable, and robust technology capableo eciently aggregating and accounting or und andinvestor data. A recent example o this is the surge in thetrend toward a multi-prime/multi-custodian environment,post the Bear Stearns and Lehman situations. Changesin accounting rules, such as the recently implementedFAS 157, are another example o where technology isgoing to be valuable in achieving an ecient processand highlights the need o being up to speed on recentaccounting developments. The administrator should beproactive on the accounting ront and in agreement withthe auditors and und management on policies, presen-tation, ootnotes, etc., in advance o year end.Matching a service provider to t the needs o your undcan be challenging. Expectations and abilities need to bemanaged by both parties. While you may be delegatingaccounting and administration tasks to an outside thirdparty, you cannot delegate the responsibility or thesetasks. Management o the process typically requireshaving dedicated personnel in-house who understandthe undamentals o und accounting and reporting andhave the ability to review and approve the work o theadministrator. Since at least some o the reporting (i.e.,investor capital balances) may come directly rom the ad-ministrator to the und’s investors, how the administratorperorms will be a refection on the und’s management.An increase in investor requests to conduct their own duediligence on the und’s service providers, including the ad-ministrator, is another consideration in the selection process.Increased demand or independence, transparency, betterreporting and more requent communication will infuencemore and more unds to eventually turn to third party admin-istrators to eciently address these trends and concerns andultimately should bring more qualitative aspects to the hedgeund industry.
Anthony Deliso is the director of operations of Eisner Fund Services LLC. 
For more information, you can contact Anthony at 212.891.6874 or adeliso@eisnerfundservices.com.
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Carried Interest Update
By: Fran Vallone
Federal
On May 11, 2009, the Treasury Department issued the“Green Book,” General Explanations o the Administra-tion’s Fiscal Year 2010 Revenue Proposals (Administration’sFY 2010 Proposals) which details the Administration’s taxchange proposals. Among the tax proposals is tax treatmentand character o carried interests.The President’s proposal to tax carried interests as ordinaryincome subject to sel-employment taxes rather than capitalgain is similar to H.R. 1935 which was introduced by Rep.Sander Levin (D-Mich.) on April 3, 2009. However, there aredierences to note.
Background
In general, a non-public investment und, structured as a lim-ited partnership or LLC, has a general partner or managingmember o the LLC that serves as an investment manager tothe und.The investment manager provides advisory and other ser-vices to the partnership or an interest in partnership’s utureprots. Under current law, once the partnership is protableand meets certain hurdles per the partnership agreement,a share o partnership prot is allocated to the investmentmanager. The partnership prot, or “carried interest,” retainsthe character (including long-term capital gain) o the part-nership income in the hands o the investment manager.
H.R. 1935 and the Administration’sFY 2010 Proposals
H.R. 1935 proposes to introduce new Section 710 to Sub-chapter K o the Internal Revenue Code. The Bill proposesto tax income rom investment services partnership inter-ests (“ISPI”) as ordinary income subject to sel-employmenttaxes. In addition, any gain recognized on the sale o ISPIgenerally would also be taxed as ordinary income.ISPI are interests received, i at the point the partner ac-quires the partnership interests, the partner or a related partyis expected to provide advisory,management, or nancingarrangement services with respect to “specied assets” heldby the partnership.Specied assets include securities, rental and investmentreal estate, partnership interests, commodities, and optionsor derivative contracts related to the aorementioned assets.As we can see rom the Administration’s FY 2010 Proposalsdiscussed below, H.R. 1935 provides  narrower language todene the type o income which would be subject to re-char-acterization as ordinary income.Under H.R. 1935 income rom “qualied capital interest” wouldnot be re-characterized as ordinary income.  H.R. 1935 identi-es qualied capital interest as the air market value o moneyor property contributed to the partnership, amounts includedin gross income under IRC Sec. 83, and the cumulative netincome or gain taken into account or years to which the newlaw would apply. Qualied capital interest would not includecapital contributions that are attributed to loans rom or guar-anteed by any partner or the partnership.In addition, the Bill provides that i a person would perorminvestment management services or any entity and held eitherdirectly or indirectly “disqualied interests” with respect to thatentity, income or gain with respect to the interest would betreated as ordinary income. In general, disqualied interestsinclude convertible or contingent debt o such entity and anyderivative instruments entered into with such entity, wherethe value o such interest would be related to the amount oincome or gain rom the assets to which the managementservices are provided.Finally, income received by publicly traded partnership (PTP)rom ISPI would be treated as ordinary income and would notbe treated as qualiying income under the PTP rules. Sometransition rules would apply.In contrast to H.R. 1935, the provision on carried interest inthe Administration’s FY 2010 Proposals states that incomerom a services partnership interest (“SPI”) would be taxed asordinary income subject to sel-employment taxes.SPI is dened as “a carried interest held by a person whoprovides services to the partnership.” The language is muchbroader than H.R. 1935 in that it does not target investmenttype services nor distinguish the types o assets required to beheld by the partnership. In addition, gain on the sale o an SPIwould generally be taxed as ordinary income.
www.eisnerllp.com

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