Tag Archives: hedge fund administrator

Hedge Fund Administrator – What is a Hedge Fund Administrator?

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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.

Survey of hedge fund administrators

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As a hedge fund attorney I am often asked for referrals to hedge fund administrators. There are many very good administration firms that I have worked with in the past – for both small and large clients. The administration firms I would recommend for a larger client are not necessarily the same firms I would recommend for smaller clients. For either small or large hedge fund clients I will usually give the client two or three different administrators to talk with. Ultimately a start up hedge fund manager must be comfortable with the contact person at his administration firm and must also be comfortable with the fees that the administrators will charge – after the hedge fund launch most hedge fund managers will be communicating more with the administrator than the lawyer so it is important that the manager has a good relationship with the administrator.

Below is a press release which details a recent survey of hedge fund administrators. The survey comes from the Global Custodian website and can be found here.

Uncertain Markets Fail To Dent Appreciation of Hedge Fund Administrators

LONDON (2 September 2008) – Despite industry-wide anxiety about market conditions, more hedge fund administrators than ever took part in the annual Global Custodian survey of client perceptions of service quality and value. Nearly 1,200 responses were received from clients of 56 hedge fund administrators.

“Despite the consolidation which has taken place in the industry, and difficult investment and financing markets, we still attracted responses for well over 50 hedge fund administrators this year,” says Dominic Hobson, editor in chief of Global Custodian. “This is only one measure among many of the buoyant conditions in the alternative investment administration industry. Our survey also picked up signs of capacity constraints, limits on client size, high rates of staff turnover and expansion into new territories. These are all problems of success. The industry is clearly in a rude state of health.”

Despite the challenges they face, the average scores awarded by clients to their administrators are also up across the board, fuelled by a response rate that surged 25% this year.

“However, the headline scores are not the sole measure of success in the survey,” adds Dominic Hobson. “There are also large differences between providers in terms of the number, size and types of client they seek to service, which is why we divided the providers into separate peer groups this year.” The new peer group rating category facilitates comparisons between providers of similar size and structure.

In the first peer group, consisting of the largest and most international administrators, Citco Fund Services continues to top the annual survey. On the biggest turnout of any provider, Citco raised its scores in all but one question, further cementing the company’s long-held domination of the top spot in the survey.

“This survey is recognized as the most important, comprehensive annual survey of our industry,” says William Keunan, Citco’s director, fund services. “We are delighted with the top rated accolade, in particular as it comes directly from so many of our clients.”

In the same peer group, scores also rose significantly at Citi, Fortis Prime Fund Solutions and PNC Global Investment Servicing.

Peer Group 1 – Overall Scores

Provider (Total Scores)

  1. Citco Fund Services 6.36
  2. Goldman Sachs Administrative Services 6.23
  3. IFS, A State Street Company 6.11
  4. PNC Global Investment Servicing 6.03
  5. HSBC Securities Services 6.03
  6. CACEIS 5.96
  7. Citi 5.76
  8. UBS GAM -Fund Services 5.75
  9. GlobeOp Financial Services 5.65
  10. Fortis Prime Fund Solutions 5.51
  11. JPMorgan Hedge Fund Services 5.14

Peer Group Overall 5.93

Administrators were divided into peer groups based on similar size and structure to facilitate comparisons among administrators

In the second peer group, which consists of smaller and often new providers with a limited international presence, scores rose significantly for AIS Fund Administration, CIBC Bank and Trust Company, Equity Fund Services and Fulcrum Fund Services, which recently agreed a merger with Butterfield Fund Services.

But it was Kaufman Rossin Fund Services that dominated the second peer group, with an impressive debut in the 13th consecutive annual survey. The company grew out of a Florida accounting firm, allowing it to grow without taking in third party investors or taking on acquisitions, and it is now larger than the average small provider, with more than $18 billion in AuA.

“These survey results clearly reflect that our strategy of controlled growth, hiring ahead of the curve and leveraging technology enables us to exceed the expectations of our clients and the industry,” says Jorge DeCardenas, a co-founding director at Kaufman Rossin.

“Our outstanding service professionals and increasing institutional client base means that KRFS is very well positioned to continue this growth while maintaining our reputation for service,” adds Keith Sharkey, a co-founding director at Kaufman Rossin.

In addition to Kaufman Rossin, several other firms made their debut in the survey as rated providers for the first time this year, including the publicly listed GlobeOp Financial Services and Quintillion (Ireland).

Peer Group 2 – Overall Scores

Provider (Total Scores)

  1. Kaufman Rossin Fund Services 6.59
  2. ATC Fund Services 6.59
  3. AIS Fund Administration 6.49
  4. Pinnacle Fund Administration LLC 6.44
  5. Fulcrum Fund Services 6.42
  6. Quintillion [Ireland] 6.31
  7. Equity Fund Services 6.28
  8. Kingsway Taitz 6.25
  9. Trinity Fund Administration Ltd 6.23
  10. CIBC Bank and Trust Company Ltd 6.08
  11. LaCrosse Global Fund Services 5.98
  12. Circle Partners 5.95
  13. OpHedge Investment Services 5.82
  14. Daiwa Securities Global Asset Services 5.64
  15. Spectrum Global Fund Administration 5.43

Peer Group Overall 6.15

Administrators were divided into peer groups based on similar size and structure to facilitate comparisons among administrators

Even as several firms featured in the survey in the past have consolidated, the number of rated providers rose from 20 to 26. Of the 56 providers for which responses were received, 39 received enough responses to be either rated or mentioned in the survey.

Responses increased 25% over last year to a total of 1,160 that could be fully authenticated.

In recent years, the custodian banks that have acquired hedge fund administrators have sought to adjust client lists in favor of larger and more profitable hedge fund and fund of funds groups interested in a broader array of services. At the same time, prime brokers have recognized that providing administration services can help attract and retain clients and counter the shift among hedge fund managers towards multiple prime brokerage.

“It would be surprising if the hedge fund administration industry continues to support such a large number of providers, and there is now evidence that a renewed round of consolidation is in the offing,” says Dominic Hobson. “However, the appetite to sell may be offset as well as encouraged by the depressed prices available. In any event, the buyers are likely to be different from the banks which dominated the acquisition process in the early years of this century.”

Despite the slowdown in merger and acquisition activity, the hedge fund administration industry also continues to spawn new and smaller providers through a mixture of back office spin-offs by fund management and trading houses and start-ups that aim to service the smaller funds that are being jettisoned by the major providers, or which reckon they can use expertise acquired elsewhere to support particular investment strategies.

“It is worth reiterating that, in spite of the testing conditions in the marketplace, more hedge fund managers than ever responded to the survey this year, and we were able to rate more service providers than ever before,” says Dominic Hobson. “This reflects not only the growing maturity of the survey, but also the larger role and increased importance of administrators as the hedge fund industry has attracted institutional investors.”

Although many administrators are controlled by banks, and there is demonstrable appetite among hedge funds for financing services, the number of hedge fund administrators interested in providing credit, leverage and securities lending services to clients remains small. Only six administrators were rated for credit and leverage in the survey.

However, the inclusion in the survey for the first time this year of questions on middle office services is a measure of the expanding role of hedge fund administrators. The middle office is a term open to various definitions, but the survey measures the performance of providers in terms of the usefulness of P&L reporting, efficiency of cash market trade confirmations, efficiency of OTC derivative trade confirmations, resolution of breaks unrelated to NAV calculations, ability to support multiple prime brokers, efficiency of OTC derivative processing (e.g. documentation management, expirations, re-sets etc.) and the sophistication of collateral management.

IFS, A State Street Company topped the first peer group in middle office services while Kaufman Rossin came out first among the second peer group.

“Five years ago the idea that hedge fund administrators would get involved in functions such as leverage, OTC derivative processing and collateral management was unthinkable at most firms, and controversial where it was not,” says Dominic Hobson. “But consolidation, more imaginative business strategies, a growing willingness on the part of commercial banks to challenge investment banks, and market circumstances are gradually eroding the barriers that once separated prime brokers, fund administrators and custodian banks. Chief among the factors at work is the anxiety of institutional investors in hedge fund strategies about exposure to the credit risk of the investment banks.”

The full results of the 2008 Global Custodian Hedge Fund Administration Survey appear in the Summer Plus issue of Global Custodian magazine. They are also available online (to paying subscribers only) at www.globalcustodian.com.

Contact:

Dominic Hobson, Editor-in-Chief, at [email protected] or +44 (0) 207 148 4280

Allison Cayse, Surveys Editor, at [email protected] or +1 513 574 0220

Muzaffar Karabaev, Survey Reprints/Research Enquiries, at [email protected] or +44 (0) 207 148 4289

Notes:

1. The Global Custodian Hedge Fund Administration Survey has been published annually since 1996.

2. A full list of revisions to the 2007 questionnaire can be found online in the surveys section at www.globalcustodian.com.

3. Providers were rated on a total of 71 questions divided into 12 service areas: client service and relationship management, value, fund accounting and valuation, investor services, reporting to investors, reporting to fund managers, compliance and taxation, corporate administration, fund structures, credit/leverage, middle office services and technology. Respondents graded their administrators on quality of service using a scale of 1 to 7, where 7 is excellent; 6, very good; 5, good; 4, satisfactory; 3, weak; 2, very weak; and 1, unacceptable. Scores were then weighted for the size and sophistication of the respondent and for performance on questions named as important in each service area by all respondents.

4. Global Custodian is the leading specialist magazine covering operational, administrative and distribution aspects of the securities, derivatives, fund management and institutional investment industries. The magazine is supported in each of its chosen areas of expertise by industry-leading surveys of the global custody, sub-custody, hedge fund administration, mutual fund administration, prime brokerage and securities financing businesses.