Fortis, one of the largest hedge fund administrators on the Isle of Man as it is worldwide, has been a significant beneficiary of the boom in the industry over the past few years.
Fortis, one of the largest hedge fund administrators on the Isle of Man as it is worldwide, has been a significant beneficiary of the boom in the industry over the past few years. From USD2bn in hedge fund assets under administration at the beginning of 2005, Fortis is now servicing assets totalling USD15bn, split equally between hedge funds and funds of hedge funds.
Charlie Woolnough, senior business development manager at Fortis FundServices (Isle of Man), says: ‘Historically hedge fund clients serviced from our Isle of Man office were relatively small. We now service five clients from the office with more than USD1bn in assets. This is clearly no servicing backwater, and there’s no reason why we could not be servicing a USD10bn manager in the future.’
For hedge funds, Fortis provides administration and investor servicing as well as bridge financing. It has greater input into the activities of funds of hedge funds since, as custodian, it has the collateral to be able to provide forex and leverage financing, typically up to three times the assets in the fund. The business has benefited from the resurgence of funds of hedge funds, whose new business appeared to be declining at the end of 2005. ‘Many people predicted the end of funds of hedge funds, but in fact the opposite occurred,’ Woolnough says.
‘The pension fund money that looked like it might never substantially materialise has gradually come through. This has given funds of hedge funds a second wind.’ However, he says, only well-established players and new entrants with niche strategies are attracting significant assets. The embedded and stable skills in the Isle of Man lend themselves to the servicing of niche and complex strategies, such as distressed debt, emerging market and fixed income funds, that may deal in difficult to value assets such as CDS baskets, synthetic CDO tranches and variance swaps.
Woolnough says that producing a NAV for complex instruments such as OTC derivatives requires judgment that only experienced professionals with knowledge and understanding of the underlying fund possess. He points to three possible methods: ‘You can build a system internally to model prices, but that is not scaleable. Or you can rely on third-party pricing vendors, which have their relative strengths. We prefer to create a basket of providers and use the best provider in each asset class.’
Only in the case of extremely illiquid instruments, such as multi-party credit instruments, would the NAV calculation be partly reliant on counterparty quotes. ‘Broker valuations were common a few years ago,’ says Woolnough. ‘This is no longer acceptable, as institutional investors require independent valuations.
‘But where it takes place, there are best practice rules that offset the potential conflict of interest. For instance, where available, it might be appropriate to take an average of several counterparty quotes. And it would be best practice to have a pricing policy document that clearly states how the
instruments are valued and, where possible, how that valuation is sourced.’
The ability of firms such as Fortis to offer sophisticated services to hedge funds and funds of funds is a key factor in the growing international profile of the Isle of Man as a centre for hedge fund administration.
Charlie Woolnough, senior business development manager at Fortis Fund Services (Isle of Man)