A hedge fund administrator is a service provider to the hedge fund; the main job of the administrator is to provide certain accounting and back office services to a hedge fund as detailed below.
Hedge fund administrator services
Generally, administrators will provide a variety of services to the hedge fund manager. The central service is monthly or quarterly accounting of investor contributions and withdrawals and computing the profits and losses for the accounting period. The administrator may also provide other back end services such as transfer agent services (handling the subscription documents and making sure checks are cashed or wires are appropriately handled).
A relatively new service which some administrators provide is a “second signer” service which is designed to give investors greater confidence that a hedge fund manager will not run off with their money. Under a “second signer” agreement, the hedge fund manager will need to get a sign off from the administrator before the manager can make a transfer or a withdrawal from the fund’s account.
In addition to the above, the hedge fund administrator may perform the following duties:
- calculating the management fee and performance fee
- working with the auditor
- keeping certain financial records
- may act as the registered agent and registrar (offshore hedge funds)
- Anti Money Laundering review (generally only for offshore hedge funds)
Three types of hedge fund administrators
Small administration firms – these types of administrators are very lean organizations which are controlled and run by one or two people. Typically the one or two people will have significant experience in the hedge fund industry, many times with other administration firms, hedge fund audit firms and hedge fund consultants. The typical client will be a start-up hedge fund. While these administrators can handle funds with assets of up to and sometimes beyond $500 million, most of their clients will generally start with less than $50 or $100 million.
These administrators are going to be the most cost-effective solution for a start up hedge fund. Additionally, these administrators often provide some of the best customer service – usually the manager will be able to talk to the principal at any time. For these administrators, the manager will be looking at a start-up fee of anywhere from $500 – $1,500 and then a monthly administration fee of $750 – $1,500.
Medium-sized firms – these firms are usually established businesses with strong structure, have been around for a while, and have a fairly large and established client base. It is expected that a medium-sized firm would have one to two principals with 10-20 years of experience in the hedge fund industry. These firms will have clients that range in size from $50 to $500 million and may have clients which have $2 to $5 billion in assets.
Medium-sized firms will charge a start-up fee of $1,500 or more and will usually base their administration fee as a percentage (basis points) of AUM, subject to a minimum monthly fee which is usually around $2,000.
Large firms – these firms are well-established within the hedge fund industry and are thriving businesses themselves. These firms may be subsidiaries of large international banks or (former) investment banks. The principals of these firms are well-connected to the major players in the industry and most of the clients of these firms are the large hedge funds. If a hedge fund uses a large firm for administration, the fund should expect to pay a minimum of around $5,000 a month. Because of the relatively high costs of the large administrators, it may not make sense for a fund with less than $250 million to use such an administrator.
Offshore hedge fund administration
Offshore hedge fund administration generally refers to the administration of an offshore hedge fund. Typically the process and function will be the same, but there are more issues that come into play with an offshore hedge fund. Because offshore hedge fund fees can be structured in a variety of ways, the administrator may want to discuss the structure with the hedge fund attorney if there are any uncertainties with the structure.
Questions on hedge fund administrators
1. How do I find a hedge fund administrator?
There are many ways you can find a hedge fund administrator and other hedge fund service providers. Your hedge fund attorney can help recommend a administrator based on the needs of your fund. Please note that not all administrators offer services to all types of hedge funds. Please contact us if you would like us to recommend a hedge fund administrator (or if you have any other hedge fund administration questions). Additionally, you can reference this survey of hedge fund administrators.
2. Who pays for the costs of the administrator?
As I noted in an article on hedge fund expenses, the costs of the administrator are usually paid by the fund and not by the management company. Some managers may choose to pay the administration costs so that these costs will not be a drag on performance. You should discuss this issue with your attorney. Additionally, please note that the costs above are general guidelines – if your strategy requires more in-depth valuation practices (i.e. the fund trades hard to value instruments), the administration costs may be higher.
3. Does a start-up hedge fund need an administrator?
Yes. While there is no law that requires a domestic hedge fund to have an administrator, there is no real good reason why a hedge fund should not have an administrator. Outside verification of a hedge fund’s numbers, especially given the current state of the capital markets, is becoming a requirement for hedge fund investors. Additionally, there are law firms which will not work with start-up hedge funds that do not have an administrator. Another consideration is the audit – if there are no independent third party numbers to review, the audit becomes more difficult and potentially more costly.