Welcome to some thoughts on the state of hedge fund administration. In many ways the industry has come full circle for me over the last 30 years. Starting at a small house in Princeton trying to keep track of a bevy of talented traders, to providing services to some of the leaders of our time, hedge fund administration has never gotten the attention it does today. Yet the goals have never changed, get it right, get it fast and get it independently.
That was the goal at Commodities Corporation in the 70’s and it’s the reason we have the steady growth in independent administrators today. The portfolios are more complex and diverse but the tools continue to evolve to meet the ever increasing requirements of managers, investors, regulators et al.
Many of the largest hedge funds employed internal staff to generate investor reports over the last 20 years. Some used administrators to provide a topside review or complete a portion of the process. Others maintained that outsourcing was too difficult for their complex trading book or could compromise the proprietary nature of their trading strategies. In the post Madoff/Lehman era this has largely become untenable for sophisticated investors, regulators, brokers, bankers and others.
The shift to outsourced administration by the larger managers has begun to both leverage and challenge the resources and experience of the administration industry. While the industry has long honed its’ skills, tools and processes to meet the demands of it’s already substantial client base, the complexity, trading volume and increased reporting demands for all hedge funds are testing the comfort level of traditional administration systems. Greater and more timely demands for transparency of performance, risk and liquidity analytics require a much closer coordination of accounting, statistical and operational data than in the past.
A good indication of this trend is an expanded due diligence process of fund of funds on the operational capabilty of hedge fund administrators. This includes expanded reviews of IT systems and software, valuation and reconciliation policies, OTC derivative processing, middle office functionality and shareholder reporting capabilities at the administrator level. Hedge funds also recognize these needs in their due diligence process on selecting their administrator. Meeting the demands of the large investor is in the common interest of both the manager and the administrator in raising assets.
To grow their business it’s clear what administrators have to provide their clients in the future. Value added services and independent reporting are common needs of the managers, investors and their counterparties. Using the administrator’s reconciled data to drive the financial, operational and analytical needs of all parties is an inherent benefit of using an integrated technologically advanced administrator.
Lower asset levels and increased pressure on management fees have already resulted in an examination of internal costs across these firms. The prospect of increased demands and lower revenue demands maximum return on administration fees. Eliminating duplicative effort by the manager, investor or others by leveraging the administrators role will clearly reduce costs to all longer term.
At HedgeServ we have looked at the process and evaluated industry needs based on the experience of our team and developed a unique solution.
For both individual managers and fund investors we have built an integrated platform that eliminates duplicative databases and multiple reconciliations common to today’s service model. Clients have real time access to their data which drives all of the tools they need for front, middle and back-office reporting. This is accomplished without restricting their use of their own proprietary systems. As an Administrator we have access to and control of the same data to ensure accuracy of reporting, reconciliation and compliance with audit, industry and regulatory standards. The use of a single trade database and security master installed at the clients office enables this streamlined operating model enhancing both timing and efficiency.
Over the next several months I hope to cover in more detail the services and capabilities that have been developed at both HedgeServ and other parts of the industry to meet the demands of this evolving marketplace. Feedback from all is encouraged to enhance this process and I welcome it. I can be reached at firstname.lastname@example.org. Until next month!=