The hedge fund industry is riding the wave of global financial services growth. Investors are growin...
The hedge fund industry is riding the wave of global financial services growth. Investors are growing in sophistication alongside the markets they invest in and they are looking at alternative strategies they would not have considered five years ago.
Fund managers are catering for this new-found confidence by launching alternative products in a number of jurisdictions. By breaking free from traditional investment strategies, they have given themselves a great deal of freedom. But while they step into the limelight of current interest in alternative funds, it is the fund administrator that must cope with ensuring these complex funds run smoothly in terms of fund valuation and accounting through to assisting with fund structure and choice of domicile.
The complexity of administering such funds requires a more specialised approach by fund administrators, a broad sample of which are featured in our survey . It is the specialist nature of this type of fund administration that is causing the biggest challenge, according to some commentators.
Ronan Daly, managing director of Hemisphere Management, believes that capacity is now a major challenge for the hedge fund industry. He says: "More products are being launched and administrators are going to struggle to find the staff to service them. Hedge funds cannot, or should not, be commoditised. They cannot be administered simply by spending on systems and having a call centre type of servicing centre. So pressure is being applied to find good, qualified accountants and administrators. There are only a finite number of such people and this issue dwarfs all others in the industry."
This is especially the case as the technology used to provide low cost and flexible information provision becomes increasingly esoteric and IT competence becomes a prerequisite. According to Dermot Butler, chairman of Custom House in Dublin, the availability of and the ability to keep qualified staff is shrinking rapidly.
"Price does not seem to be the key. There appears to have been a culture change over the past several years. A career path is no longer deemed as attractive as the development of a varied CV," he says.
David Bailey, European product developer for the Bank of Bermuda, agrees that the quality of staff needs to be higher for hedge funds. He says: "Some of the most complex and creative investment strategies are seen in these vehicles and it is important that experienced staff are involved. Finding the right staff in such a competitive market can be difficult."
Meanwhile, the breadth of services provided by administrators is increasing. Performance measurement, traditionally a fund manager activity, is an instance in point. As information systems become more integrated and modernised, it would be an obvious and low-cost addition to the stable of administration services.
As part of the drive to add value, companies have been considering introducing risk analysis as part of the services on offer. But there are some critics of this that argue it is part of the fund manager's responsibility and, although there is no reason not to outsource it, it should remain independent from the administrator's role.
As pressure mounts to conform to global standards in the financial services industry, hedge funds find themselves in an awkward situation because hedge funds tend to be non-standard. As soon as a manager launches a hedge fund, a huge variety of possible strategies presents itself. For example, property investment is entirely different from merger arbitrage and one specific, strictly defined template for an offering document could not cover both. Streamlining between hedge funds can therefore only occur in the most general way.
Custom House has suggested a few areas in which standardisation would be possible. These include advocating a clear valuation policy. Butler says: "If you have a long/ short equity fund, you can take the valuations off Reuters or Bloomberg. There is no problem, but in the case of private equity or some special swaps and for some forms of guaranteed product, how do you calculate the valuation?"
He suggests a consensus between actuaries, alongside a third party (to maintain objectivity) and this would be made explicit in the offering document. He embraces the 'separation of powers' philosophy and thinks administrators should get all the information required for fund valuation directly from stockbrokers and banks and not from the investment managers themselves.
Reasons to be cheerful
Total investment reaches £9m
Medium to long-term capital growth