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5 Reasons to Hire an Independent Administrator for Your Hedge Fund
February 09, 2013
NEW YORK- New hedge funds are frequently forming as a result of spin offs from proprietary trading operations, starts-ups of seasoned portfolio managers or newcomers armed with cash from family members and friends. Hedge Fund Research reports that more new hedge funds started in the first quarter of 2012 than any quarter since 2007.
The level of hedge fund fraud has significantly changed the way investors perform due diligence. The industries best practices have morphed into the need to hire a third-party independent administrator to ensure the fund meets the scrutiny of regulatory agencies and investors.
These third-party hedge fund administrators offer the following core services:
–Reconciliation services for cash, trades, and positions
–Track fund level accounting
–Investor Anti-Money Laundering (AML) and "Know Your Client (KYC)
–Striking NAV of dealing dates
–Maintain investor registry
–Processing subscriptions, redemptions, and transfer requests
–Preparation and distribution of investor statements
Perhaps the most important function of an independent fund administrator involves the calculation of the net asset value of the fund and to make sure that all the transactions processed really occurred.
1) Ensure checks and balances
After the financial crisis of 2008 and a slew of scandals, including the Bernard Madoff and MF Global incidents, hedge fund investors want someone other than the fund manager or the investment advisor verifying the NAV of their funds. Independent administrators represent a crucial check and balance. They can also provide assistance and guidance for audits.
2) Regulatory compliance
The regulatory market is constantly evolving and hedge fund managers face more and more regulations. The Dodd-Frank Act and Private Fund Investment Advisers Registration Act here in theUnited Statesand the Alternative Investment Fund Managers Directive inEuropehave a significant impact on the industry.
Changing regulations requires managers to plan and prepare and implement a compliance program. Increasingly, fund managers contract with an independent administrator who stays current with all rules, regulations, and laws. The administrator can carry out accurate and timely performance of these duties as necessary to comply with applicable regulations.
3) SSAE16 compliance mandate
One of the most important is the need to which Statement on Standards for Attestation Engagements (SSAE) No. 16, which replaced SAS 70 on June 15, 2011. SSAE 16 provides the authoritative guideline governing the controls and systems required by hedge funds and other service organizations.
SSAE 16 offers one of the most objective available barometers for fund managers to develop confidence and trust in an independent fund administrator's ability to provide a high degree of transparency as determined by an audit of their controls and systems. This also ensures that they are working with a reliable partner.
4) Fair pricing
A fund administrator can make sure that the trading and subsequent valuation of securities and funds takes place under fair market pricing. Depending on the type of holding, the independent administrator may need to utilize various mathematical models, tolerances, and sources to determine fair market valuation of the fund and underlying securities. This is particularly critical with illiquid securities where brokers may need to be contacted to source an accurate market price.
A third-party administrator can play a critical role in helping a fund manager’s ability to grow and develop the hedge fund. For managers looking to scale a fund rapidly, the administrator reduces overhead and expenses for the fund by eliminating the need for operational staff and administrative expenses.
The independent fund administrator takes on the extra work and leaves the manager free to focus on other aspects of overseeing the fund-- managing portfolios, researching and trading, developing products, raising capital, or managing client relationships.
An independent administrator can perform critical non-core operational and administrative functions which reduces operating costs and can also relieve the fund manager of certain time-consuming duties. Most importantly, the independent fund administrator offers third-party verification and confidence of the fund results to clients, which in today's marketplace is a must.