If one were to sum up the key role of a hedge fund administrator, it is to independently value a fund's assets, allocate those assets correctly to individual investors, and accurately report the allocations to those investors.
Investors want an administrator, not the manager, to independently calculate the fund's assets and monitor the books and records, and to report the fund's NAV. For any new start-up manager, it is worth remembering that when selecting the most appropriate administrator they understand that whilst the administrator will ordinarily perform a range of middle- and back-office functions, at a high level they:
• Independently value the Fund's assets
• Act as the Fund's official books and records
• Independently report to the Fund's investors.
"Managers are well advised to view a fund administrator as a partner and an extension of their business," states Dennis Westley, Managing Director (North America), Apex Fund Services. "A fund administrator should be selected that has the capacity to scale as the fund and manager grow and the manager's strategy evolves. They should present a value proposition to potential capital, in particular institutional investor capital."
Such is the nature of hedge fund investors today that most will expect the manager to perform thorough due diligence before appointing the fund administrator. In Westley's view, key areas that managers should focus on include:
• Technology
• Product Experience
• Internal Control Environment
• Cross-border Service Capabilities
• Financial Stability and Ownership Structure.
With respect to technology, there will be various issues for managers to seek assurances on. For example: Can the fund administrator meet the fund's objectives? Can it provide flexible investor transparency and support regulatory, financial and tax reporting?
"Technology is especially important when the strategy trades derivatives and other complex instruments, has a high turnover of trades, and uses multiple counterparties," explains Westley.
Product expertise
This is more a function of the administrator's quality of staff than system capabilities, but in essence the two go hand in hand.
"Here in the United States, for example, Apex has a lot of experience with impact lending and peer-to-peer lending. If a manager planning to launch such a strategy were to go to an administrator that predominantly supports equity strategies, they may not be the best fit."
"Therefore, managers need to be sure that the administrator has a track record of experience in supporting their particular product and has staff that are able to recognise potential issues and deal with them correctly. Ultimately, the fund administrator should be well versed in the manager's product, structure and strategy," says Westley.
Cross-border service capabilities
For managers starting out, a standard onshore-offshore master-feeder structure might only apply for the first couple of years. Managers today have to raise assets globally and may eventually find an investor that likes their strategy but doesn't want to invest in their Cayman feeder; perhaps they would prefer a UCITS product, or an AIF product.
"Managers might start off with a simple offshore product, but they often expand their product mix based on global investor demand. To that end, the manager will want to know that his fund administrator can support him. At Apex, we have 26 offices globally that can deliver proper cross-border capabilities," concludes Westley.
