Three quarters of hedge fund investors believe hedge funds should completely outsource valuation to an administrator, although nearly an equal number of managers (71%) perceive risks in fully outsourcing the task, according to Ernst & Young’s fifth-annual survey of the global hedge fund market.
However, nearly two-thirds of both groups agree that administrators have a positive impact on investor confidence, the report found, although just one in four managers or investors is confident that administrators can accurately value less-liquid Level 3 assets.
The survey also found that 76% of investors want shadow accounting, but only 35% are willing to pay for it. Shadowing often results in a replication of the work that administrators are performing, Ernst & Young says, which then requires reconciliation between the funds and the administrators systems.
The findings reveal a significant duplication of efforts and a business model that is expensive and unique to the hedge fund industry, says Arthur Tully, co-leader of Ernst & Young’s Global Hedge Funds practice. Over the long term, hedge funds will likely reexamine their shadowing activities and begin to create a control environment that takes advantage of the administrators strengths while building in controls to address any shortcomings.
The survey also found that regulation is the primary concern for 48% of hedge fund managers and 36% of investors.
The findings were compiled by consulting firm Greenwich Associates for Ernst & Young. The study polled 92 hedge fund managers and 42 institutional investors.
(CG)