Ever since the collapse of investment bank Lehman Brothers in 2008, the business relationship between hedge funds, fund administrators and brokers has changed dramatically, says George Michaels, CEO at technology firm G2 Systems.
“We have seen a big shift in the relationships hedge funds have with the prime brokers and fund administrators,” says Michaels. “There has been quite a heavy migration of functionality away from prime brokers over to fund administrators, as most hedge funds need multi prime safety but still need risk management from somewhere.”
Michaels adds that since the Lehman collapse, some existing regulations are naturally driving a new type of relationship between these three parties.
“Tax functions such as Wash-Sales analysis are not possible unless the service provider has a comprehensive view of all global custodian data, so now there are third-party administrators and trying to scramble and fill the void for risk management and tax analysis that used to be served by the primes,” says Michaels.
The Wash-Sale rule was established to disallow a loss deduction of a security sold, if within 30 days of the date of the sale an investor buys substantially identical stock or securities, or purchases options on the underlying security.
The Wash-Sale period is in fact 61 days, consisting of the 30 days before to 30 days after the date of sale.
“Third party administrators had previously been viewed as book keepers or accountants on a basic level,” says Michaels. “However, as hedge funds and mutual funds have been looking for more risk management capability that prime brokers can no longer provide or pay for, they are turning to the fund administrators. This creates a problem for the administrators because, unlike the primes, they cannot simply raise brokerage fees or margin interest rates to offset the cost of providing these new functions.”