Value Proposition and Fund Administration

Although administrative work may never be as glamorous as the shimmering halls of hedge fund offices, the additional comfort and added services offered should not be overlooked by Investors and Asset Managers alike. Today, as regulations tighten and the aftermath of 2008 settles, the hedge fund industry is overwhelmed with the demands of operational due diligence and increases in transparency, the control environment, liquidity, and independent oversight. Whereas to successfully fulfill such demands, Hedge Fund Managers must choose to outsource internal functions and partner with independent Fund Administration firms. Firms that not only have a proven track record but that will also be proactive in adapting their service model to the ever increasing demands of its clients and their stakeholders. To provide some further insight, Scott Price, Vice President and Managing Director of Custom House Fund Services (Chicago) LLC, a global fund administration firm establish in 1989, has provided some brief responses to questions regarding the changes and valued added services within the fund administration industry and how Custom House aims to be at the forefront of that change. What are some of the more major trends you are seeing within the industry? Consolidation. Similarly to 2011, I believe a major trend in 2012 and onwards will be the consolidation and acquisition of the smaller boutique or specialist fund administrator firms. This will most likely result in many independent firms being acquired by larger and longer established service providers. I also expect that the remaining independent administrators will invest heavily into their technology and infrastructure. Fund administrators are now being required to supply more comprehensive and more frequent reports that are more transparent in nature and focused towards the investors. The days of simply producing a valuation and communicating the NAV to the funds investors are somewhat past and we must have an adequate strategy and resources to cope with both the onslaught of investor transparency demands as well as any regulatory changes. Those that cannot adapt and provide a saleable solution will become obsolete. Will this consolidation have any significant operational impact and if so, what is important for managers to know in this regard? Typically, we are seeing firms offer what they present as a onestop shop to fund managers. So it can be quite attractive for a hedge fund to partner with a firm that can provide a full suite of different services, whether that be custody, brokerage, administration, compliance support, etc. However, investment managers should be aware that such simple solutions do not always equate to the best choice. Of course, many companies can provide superior services to a wide range of offerings but a common problem is that a one-stop shop service provider may offer poor or limited services in areas that are not their core competency. Therefore, it is important to investigate each service individually and ensure that you will not only receive the necessary reports but also the necessary customer service and on-going support for each service offering. Is there value in onsite visits to the Fund Administrator and what are the typical questions you experience from investors during those visits? Yes, every investor accepts and appreciates the importance of comprehensive due diligence on a potential manager. However, this is only one component, as all service providers within the wheelhouse of the Fund should be assessed, especially the chosen fund administrator. Overall, managers will do the necessary deep dive before choosing their administrator, so it is really up to the investor to ensure this was done to a high standard and ensure a strong control environment exists in order to produce truly independent valuations. They should also assess the provider within the framework of business risk, as well as ensuring that they work with an administrator who offers a true scalable and customized offering.
2011 Corgentum Consulting, LLC

Initially, an investor must simply verify that each manager has an administrator appointed and most importantly that they are separate from the manager. You can do this by merely verifying given addresses. Also, an investor can ask each administrator for a completed DDQ (and read it!), references from current clients and the SAS 70 document. This will highlight the valuation procedures, cash controls, segregations of duties (to name a few). It would also be recommended to ask for specific contacts of senior management at the administrator and request a call, if not on-site visit was scheduled. Lastly, where do you see the industry heading in the short and long term? In the short and long term I would suspect that regulation will be an absolute challenge for the fund administration sector. With the JOBS Act expecting to pass and FATCA requirements being rolled out in the near future, this will undoubtedly have an effect on Fund Administrators and their potential role. For example, FATCA, with administrators having access to the majority of all the relevant investor information it seems appropriate for us to play a critical role with the compliance of such new regulations. Custom House is being proactive to identify exactly who this will affect so that when the requirements are made known we will be prepared to act. This may cause major data maintenance problems for other firms that do not have the necessary infrastructure to handle this demand and report. Scott Price can be reached via email at scott.price@us.customhousegroup.com Originally posted in the May 2012 edition of Corgentum Consulting's Operational Due Diligence Insights. For More info@corgentum.com Information Corgentum.com | Blog | Twitter Feed Tel. 201-360-2430 About Corgentum Consulting: Corgentum Consulting is a specialist consulting firm which performs operational due diligence reviews of fund managers. The firm works with investors including fund of funds, pensions, endowments, banks ultra-high net-worth individuals, and family offices to conduct the industry's most comprehensive operational due diligence reviews. Corgentum's work covers all fund strategies globally including hedge funds, private equity, real estate funds, and traditional funds. The firm's sole focus on operational due diligence, veteran experience, innovative original research and fundamental bottom up approach to due diligence allows Corgentum to ensure that the firm's clients avoid unnecessary operational risks. Corgentum is headquartered at 26 Journal Square, Suite 1005 in Jersey City, New Jersey, 07306. Phone 201-360-2430. For more information visit, www.Corgentum.com or follow us on Twitter @Corgentum

2011 Corgentum Consulting, LLC