February 2009

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THE VOICE OF THE ALTERNATIVE INVESTMENT INDUSTRY

Global Administration Round Table

Confronting a challenging environment
CONTRACTION

INDEPENDENCE

Entering 2009 most

administrators are braced
for a more challenging
environment, fewer funds
and more
regulation.

Many investors are beginning

to demand independent fund
administration. This could give
a much needed boost to the
industry.

REGULATION
Tighter oversight and scrutiny
of hedge funds could lead to
new rules impacting the fund
administration industry.

16

CHANGING INDUSTRY
Significant changes are
expected in the wake of
tighter regulation, demands
for more transparency and
increased
outsourcing.

22

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SPECIAL REPORT: ROUND TABLE

Participants in the Global

Administration Round Table
ACE Fund Services

GlobeOp Financial Services

Mara Alido Spencer, managing director

Hans Hufschmid, CEO

AIS Fund Administration

Grant Thornton Fund Administration

Paul Chain, president

Adrian Hogg, director

Apex Fund Services

International Financial Administration Group

Peter Hughes, managing director

Derek Adler, director

ATU Fund Administrators (BVI)

Kleinwort Benson

Sebastien Tatonetti, fund administrator

Joseph Truelove, head of business development Guernsey

corporate clients

Bank of New York Mellon

David Aldrich, managing director

LaCrosse Global Fund Services

Stuart Feffer, co-CEO

BNP Paribas Securities Services

Maria Cantillon, global practice leader, alternative funds

Northern Trust

Butterfield Fulcrum

Ian Headon, manager for alternatives, Europe, Middle East and

Africa,

Akshaya Bhargava, CEO

RBC Dexia Investor Services

Capita Financial Group Ireland

Jos Santamaria, director, business development

Paul Nunan, managing director

SEI
Citadel Solutions
Matthew Wilson, head of sales and client service

John Alshefski, senior vice president and managing director,

investment manager services division

Citi

SGGG Fexco

Karen Tyrell, managing director, head of alternative investment

services, EMEA, global transaction services

Sharon Grosman and Brendan Conlon, director

State Street Alternative Investment Solutions

Conifer Securities
Jack McDonald, president and CEO

Deborah Yamin, senior vice president of strategy and product

development

Fortis

Trinity Fund Administration

Charlie Woolnough, European regional director for sales and

relationship management

John McCann, managing director

UBS Global Asset Management

Gemini Fund Services

Don McClean, head of fund services Ireland

Andrew Rogers, president

Valletta Fund Services

Kenneth Farrugia, general manager
Extended versions of all questions will be available on the website www.hedgefundsreview.com (Special reports).
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February 2009 | SPECIAL REPORT | S3

SPECIAL REPORT: ROUND TABLE

Industry braces for contraction

What are the main challenges facing fund administrators over the next 12 months?
No one denies 2008 was a difficult year for the
hedge fund industry. When assets under management (AUM) decline, so too do assets under
administration (AUA). Entering 2009, most fund
administrators are braced for a more challenging
environment and are looking ahead to how the
service industry will be evolving in response to
fewer funds and more regulation.
Events in 2008 made it clear no one is immune
from credit deterioration. Hedge funds are no
longer able to take the credit of counterparties
for granted and this will change behaviour, comments Hans Hufschmid at GlobeOp Financial
Services. He expects to see a continuing trend
of using multiple, rather than single, prime brokers. Operationally, he believes administrators
will need to provide a platform that gives funds
access to a multitude of prime brokers and facilitates seamless movements from one to another
while providing 24/5 real-time access to counterparty credit and risk exposure data.
Hufschmid foresees operational challenges as funds move away from the practice
of over-the-counter (OTC) give-ups in order
to diversify that risk over multiple counterparties. To operate successfully under this new
model, a hedge fund administrator will need
to provide clients with a comprehensive OTC
infrastructure: pricing, payments, reconciliations
and collateral management. Data accuracy and
access will be essential to effective strategic collateral management, concludes Hufschmid.
At Valletta Fund Services, Kenneth Farrugia
believes the current market turmoil has already
brought a multitude of challenges. These he categorises as operational or business driven. The
operational challenges include the valuation of
illiquid securities, structured notes and certain
OTC derivatives, comments Farrugia.
Paul Nunan at Capita Financial Group (Ireland) believes the main challenges for administrators will be dealing with an increased number
of fund liquidations together with a continued
focus on areas such as side pockets and redemption gates.
John Alshefski at SEIs investment manager
services division points to research that his company did with Greenwich Associates. This shows
that institutional investors remain committed to
hedge funds, provided that managers meet certain criteria around transparency, risk mitigation, better reporting and other matters close to
investors hearts.
Those administrators that can differentiate
themselves by providing services that enable
their clients to communicate better and reassure
their investors will prevail, he says.
Administrators will be challenged to meet
investor demands for reporting and transparency and to integrate more compliance checks
into their operational model. These requirements and systems can be prohibitive for smaller
administrators that lack scale. That will certainly
be one challenge the industry will face this year,
concludes Alshefski.
With recession under way and redundanS4 | SPECIAL REPORT | February 2009

cies looming, the media and society are not

applauding or celebrating the financial services
sector or the hedge fund industry, says Adrian
Hogg at Grant Thornton Fund Administration.
It is now time for financial services and the
hedge fund sector to ensure that recent scandals
do not reoccur and that adequate safeguards
are put in place by all stakeholders in the sector
to ensure that investors wealth is protected,
declares Hogg.

Strength in difficulty
Karen Tyrell at Citi is aware of the difficulties
facing the industry and markets but also sees
resilience and strengths in the industry. We continue to see redemptions and falling NAVs in the
hedge fund industry. Together with the various
fund restructurings, with gates and side pockets,
there are performance and revenue pressures on
all of us, she comments.
With these challenges come opportunities. We
are seeing the blurring of hedge and traditional
long strategies. This has played to the strengths
of those administrators who have experience
working with larger institutions as well as hedge
funds, says Tyrell.
Over the next 12 months, fund administrators
will have challenges generating new business,
believes Akshaya Bhargava at Butterfield Fulcrum Group.
Joseph Truelove at Kleinwort Benson agrees
that the market downturn is bringing a different
set of challenges to the fund administration
industry. Whereas before new business take-on
was the main pressure point with clients wanting
to launch a large volume of new funds, the current prevailing work has shifted towards liquidations of funds, while a number of clients have
required extensive assistance with deleveraging
and raising additional capital. This is likely
to continue for some time as the hedge fund
industry goes through a period of consolidation,
he predicts.
At LaCrosse, Stuart Feffer says declining asset
levels across the industry will be a primary challenge during the first half of 2009. Fund administrators have become accustomed to explosive
growth, and it appears that those days are over
for now, he declares.
Although he still sees some asset growth, for
us the primary bright spot has been credit-orientated, distressed credit, and credit opportunity
funds, in particular funds trading whole mortgages and loans. These can be extremely difficult
to service and require specialised expertise. Only
a small subset of the administration industry can
service them effectively.
Diminishing assets and the closure of funds is
the main concern of Andrew Rogers at Gemini
Fund Services. With the waning of assets and
the liquidation of funds, administrators will see
their profits fall off. As a result of the decrease
in profits, many fund administrators will unfortunately be forced to lay off their employees and
cut back on expenditure. Given the new regulations for hedge funds, fund administrators will

have to make sure their current policies and procedures are in compliance, explains Rogers.
State Street Alternative Investment Solutions
Deborah Yamin sees the main challenge for
administrators as providing effective support for
clients in greater disclosure, increased transparency, a stricter regulatory environment, managing costs, and more focus on both operational
risk management and portfolio risk management
capabilities.
The role of fund administrators in this
environment is to provide scale, independent
third-party perspective and the ability to adapt
quickly, says Yamin. For example, in response
to mounting pressures for better operational risk
management, fund administrators need to demonstrate and document the strength of their operational controls and provide greater disclosure to
fund managers and the managers investors.
David Aldrich at Bank of New York Mellon
believes the challenge for boutique companies
will be how to make money when AUM and revenue has just dropped significantly. This has
happened at a time of increasing complexity of
service needs from the funds. The challenge for
the well-capitalised firms is to ensure that the
new business can justify the investment required
and that care is taken with handling the inevitable flight to quality, he adds.

Financial pressure
Charlie Woolnough at Fortis is also concerned
with shrinking assets. Many administrators will
come under increasing financial pressure, especially those who have historically competed on
price rather than service quality to win administration mandates, he forecasts.
At AIS Fund Administration, Paul Chain
agrees. The main challenge will be running an
operating business in a marketplace that has
shrunk. Many administrators are now faced with
declining AUA (read revenues) and the attendant
problems such as: declining margins or even red
ink, layoffs and very little visibility for business
prospects.
SGGG Fexcos Sharon Grosman and Brendan
Conlon say two elements will be crucial for fund
administrators in 2009. First is planning and
control. An uncertain environment makes planning difficult and with declining revenue, some
administrators will find it more difficult to cope
with costs already incurred to drive previously
planned expansions.
The second element, new business growth, will
also be testing. Many hedge funds are looking to
find alternatives to their existing administrator
in order to reduce cost, they say. This will benefit some administrators who are competitively
priced.
Ian Headon at Northern Trust sees both
challenges and opportunities. Responding to
the growing body of regulatory requirements,
greater investor demands for transparency and
the need to make continued product enhancements will stretch administrators. In view of
these accelerated challenges, we expect more selfwww.hedgefundsreview.com

SPECIAL REPORT: ROUND TABLE

administered funds to actively seek outsourcing

relationships, he says.
Valuation issues, particularly in disorderly
markets, are a concern for Jack McDonald at Conifer Securities. Identifying and implementing
technology that can evolve and accommodate
booking complex/exotic security types, as well as
accommodate new disclosure requirements, such
as FAS 157 he says are challenges for 2009.
Peter Hughes at Apex Fund Services believes
maintaining service levels and quality staff
while fee revenues fall significantly is the biggest
challenge. There may also be consolidation in
the industry and this usually disrupts the service
levels that fund managers and their clients
receive, he says.

Survival of the fittest

At RBC Dexia Investor Services, Jos Santamaria
says it is a combination of staying focused
on the big picture while managing costs in a
declining revenue market. Ongoing investment in
systems, people and delivery of evolving services
ie independent valuation and middle office for
OTC derivatives are core to long-term viability
as a service provider.
He says the workload for many administrators
has increased as many funds activate gates, suspensions and full liquidations even while administrators face lower AUA and revenue. The
administrators who can weather the storm will
be those with the foresight to invest in technology
and the flexibility to offer excellent client service
during these turbulent times, he concludes.
One of the main challenges facing administrators is to have a platform and service offering set
up in an optimal way to provide the solutions that
clients want, says Don McClean at UBS Global
Asset Management. Flexibility is key. We antici-

pate regulatory changes and in the reporting

requirements for both regulators and investors,
he says. The daily environment will continue to
be requested and, ultimately, what will set one
administrator apart from another is the ability to
provide independent services that are solid, reliable, correct and timely.
According to John McCann at Trinity Fund
Administration, a main opportunity is the
emphasis investors will increasingly place on
the appointment of an independent administrator. The expected reallocation of capital
means administrators who are able to adapt to
regulatory and changing client requirements
will be well placed to pick up new business, says
McCann.
There will be a widening and deepening of
products and investment strategies employed
and the instruments created to achieve them, as
well as the need to keep up with the pricing, valuation and accounting issues of the strategies and
instruments, believes McCann.
Institutional clients are now demanding independent valuations and an enhancement of
transparency. There will be a need for a more
frequent valuation cycle, moving towards daily
pricing. More clients are requesting this, particularly since the Bernie Madoff affair. There
will be continued convergence between the managed account platform and the fund offering, he
says.

Disclose, disclose, disclose

I think the industry as a whole, including institutional investors and the regulators, will force
hedge fund managers and their funds to have
an external seal of approval across many more
areas, well beyond the historic core reporting
services NAV calculation, financial reporting

etc and disclose, disclose, disclose will be their

mantra.
At International Financial Administration
Group, Derek Adler believes the biggest challenge facing administrators is simply not getting
caught up in potential fraudulent funds.
Matthew Wilson at Citadel Solutions believes
administrators will be challenged to become more
automated and efficient. We can also expect to
see consolidation in the industry as many disadvantaged players capitulate to more technologyadvantaged players, he believes.
It will be imperative in 2009 to leverage scalable technology and retain key talent to maintain
margins despite declining assets in the hedge
fund industry, says Wilson. Only the most efficient technology-enabled players will be able to
sustain and develop customer service levels.
Mara Alido Spencer at ACE Fund Services
agrees with Wilson that administrators will need
to evaluate their automation processes, technologies and risk control systems. Staffing will also
be a challenge as administrators may need to
evaluate their internal structure to ensure proper
personnel allocation. Administrators that have
the resources and are flexible enough to adapt
their business model with the changing times
will be in a better position to add value services
and take advantage of new opportunities, she
concludes.
The main challenges, according to Sebastien
Tatonetti at ATU Fund Administrators (BVI),
will be on the legal and staffing side. As many
funds will close in the coming months, administrators will need to manage their resources
carefully to have enough capacity to handle the
closing funds and to make sure there is enough
capacity for the new funds that are launching,
he says. n

MOVE TOWARDS DAILY NET ASSET VALUATION GAINING MOMENTUM

What percentage of the funds you administer
request daily NAV calculation? Are more funds
asking for this service?
John Alshefski at SEIs investment manager services
division says daily NAV calculations are increasingly in
demand. We have seen many of our clients requesting
these as once again the importance of transparency is
highlighted.
At Gemini Fund Services, Andrew Rogers says
approximately 21% of funds request daily NAV
calculations. We have seen an increase in the number
of funds requesting weekly or mid-monthly NAV
calculations, he confirms.
At Apex Fund Services, only 5% of clients request
daily NAV but Peter Hughes says this is slowly
increasing. He says many managers are reluctant to
pay the additional costs of this administration. This
needs to be driven by the investors and their liquidity
needs.
Don McClean at UBS says the daily environment is
critical to successfully delivering the services required
by our clients. He expects increased demand for this
to be a trend emerging as a result of market difficulties.
Being well positioned to be able to deliver highquality, flexible and tailored services for clients will be
critical to future success, he believes.
Half of the funds administered by Capita Financial
Group Ireland are Ucits. Paul Nunan says they offer
daily liquidity and in the current market daily liquidity
is seen as especially attractive and for some investors is
now seen as essential.

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The investor mindset has been transformed in recent

years says Jos Santamaria at RBC Dexia Investor
Services. Double-digit returns no longer suffice in the
absence of timely valuation reporting. We no longer
live in a world of monthly or quarterly reporting.
Institutional and high net worth investors want portfolio
data much more quickly, especially during periods of
steep market declines and high volatility, as witnessed
in 2008.
He says calculation of daily profit and loss valuations
is increasingly being outsourced as a natural extension
of the formal NAV process to the administration. This is
then used by the manager to complement the weekly
estimates.
Over half of Stuart Feffers clients at LaCrosse receive
a daily estimated NAV. Those that do not request this
service generally trade less-liquid instruments with a
longer investment horizon.
Paul Chain at AIS Fund Administration confirms
his company provides daily NAV calculation. Our
philosophic approach to the business is that the best
way to calculate a timely and accurate monthly NAV is
to do it every day, he says.
David Aldrich says Bank of New York Mellon in
Ireland calculated over 125,000 daily NAVs in 2008. It
is possible that daily could become the new monthly for
portfolio valuation purposes in the alternative space,
but not necessarily for shareholder dealing where the
trend has been for less frequency in many cases.
We calculate daily NAVs for all of the hedge funds
we administer, says Deborah Yamin at State Street.

Karen Tyrell at Citi says the company does not

disclose this information. However, it has noted there
is an increasing demand for this service from our clients
and we have a number of funds to which we provide
this service today.
At Butterfield Fulcrum Group, Akshaya Bhargava
says there is a marked increase in clients requesting
more frequent reporting and more transparency in
particular, daily pricing and daily profit and loss (P&L).
Yes, this is becoming a regular requirement and is
something that we welcome, confirms Ian Headon
at Northern Trust. To the extent that it is feasible
and realistic, especially in the context of high-volume
derivatives, we welcome and regularly accommodate
daily valuations of hedge and other fund types.
At Trinity Fund Administration, John McCann says he
provides daily NAV calculations for 30% of the funds
administered. More and more funds are requesting
this service in increasing numbers, he notes.
GlobeOps Hans Hufschmid says he provides daily
P&L to all fund clients but has very few requests for
daily NAVs. We provide daily P&L to all fund clients.
Very few request daily NAVs, says Hufschmid.
Conifer Securitiess Jack McDonald has a different
view. He says none of the funds he administers request
daily NAV calculation. Daily NAV seemed more popular
a few years ago. Since that time expectations have
been modified, given the fact that managers see daily
comprehensive portfolio performance which is generally
more than satisfactory for those investors seeking
further transparency.

February 2009 | SPECIAL REPORT | S5

SPECIAL REPORT: ROUND TABLE

Transparency top priority for 2009

How do you think transparency and risk reports will develop? What will investors want in
the short, medium and long term? How will their needs change? Aside from institutional
investors, what other factors will influence these reports in the future?
Most fund administrators expect a substantial
shift of priorities of both fund managers and
investors to transparency and risk reporting.
While the degree and scale of that shift has yet
to be determined, administrators are gearing up
for more detailed and frequent reporting to managers and investors.
We see a major shift towards more transparency, declares John McCann at Trinity Fund
Administration. Investors have focused more
on investment returns than on business basics,
he says.
More funds will provide transparency and
risk reports to investors, agrees Andrew Rogers
at Gemini Fund Services. This will happen as
investors require additional disclosure from the
funds in which they invest.
The challenge, points out Don McClean at
UBS, is to offer a flexible and tailored service
to meet clients requirements. What clients are
increasingly looking for is to invest in vehicles
where they understand the product/structure,
the investment approach and how the strategy is
executed. Given recent events, clients are likely
to seek this level of comfort even more.
We see an increase in client interest in attribution and exposure reporting, confirms Jack
McDonald, at Conifer. Investors will likely want
more transparency, broader reporting and abbreviated due dates. Risk management will also
increase in usage, he notes.
There will be a greater demand for risk
reporting and transparency around reconciliations and pricing, says Jos Santamaria at RBC
Dexia. What remains to be seen is how timely or
thoroughly the investor will review and question
these issues as opposed to continuing to focus
mainly on the market valuation reports.

David Aldrich at Bank of New York Mellon

thinks reporting capability has reached new
levels of transparency. It is now possible, using
a service such as Investor Analytics, for investors to have direct access to third-party risk
reporting tailored to their precise needs, he concludes.
In the short term, investors will expect NAV
calculations from an independent administrator,
at the very least, as a prerequisite for investing
with a hedge fund manager, says Maria Cantillon at BNP Paribas Securities Services. In the
medium to longer term, investors will expect an
independent provider to calculate the risk and
performance data that many hedge fund managers now make available to their top-tier investors. The most accurate source of data for these
reports is the official books and records of the
fund, maintained by the independent administrator, she notes.
A major challenge for hedge fund managers
will be finding a way to increase disclosure
without compromising proprietary trading
advantages, believes Deborah Yamin at State
Street. There will likely be increased demand
for investor reporting from hedge funds to be
delivered by a third-party provider such as an
administrator, she notes.
Matthew Wilson at Citadel believes investors
will continue to request increased transparency
in their underlying fund managers. We believe
that aggregated position reporting providing
information on exposure to certain asset classes
and sectors will be a common request, he says.
Investors will continue to want information faster and in as clear a format as possible,
believes Ian Headon at Northern Trust. To meet
the greater reporting challenges, outsourcing

firms should have a focus on providing tools

that help both fund managers and their investors monitor performance and assess risk, he
advises.
Transparency will be the buzz-word for 2009,
foresees Akshaya Bhargava at Butterfield Fulcrum. The ability of administrators to provide
transparency and risk reporting will become a
key differentiator. Risk systems will change from
value-at-risk models to what-if, more futuristic
approaches, he forecasts.
Fortiss Charlie Woolnough says transparency and risk reports will only develop with
the frequency and detail that fund managers
are willing to provide. There has clearly been a
change in the balance of power between investors and fund managers over recent months,
which have seen investors now being able to
dictate the terms of their investment to a much
greater extent, he concludes.
In the short term, investors will want independent proof and documentation of basic fund
facts i.e. that assets exist, positions are true and
cash reported is real, opines Hans Hufschmid at
GlobeOp. Self-administration is now fading
as an acceptable practice for most investors so
those funds, many of them well established and
successful, will need to move quickly to secure
independent verification by working with independent administrators, he says.
At Valletta Fund Services, Kenneth Farrugia
says investors will want assurances that the
investment policy adopted by the fund manager is commensurate with the risk profile of
the investors. Increased risk disclosures are
required to ensure that investors are fully aware
of the risk/reward relationship of the investment
strategy being adopted, he says. n

QUIET OPTIMISM FOR 2009 BUSINESS PROSPECTS AFTER MASSIVE MARKET UPHEAVALS
What percentage of hedge fund/
fund of hedge fund clients have
you lost/gained in 2008? What are
your forecasts for 2009?
Despite the massive redemptions
experienced by hedge funds and fund
of funds, as well as the looming global
economic recession in 2008, most
fund administrators say they had a
net increase in clients and are quietly
optimistic about the prospects for 2009.
SGGG Fexco confirms it experienced
a net increase in 2008 over 2007 of
around 25% and expects to see a
similar net gain in 2009.
Gemini says it lost 17% of clients
and gained 29% in 2008. In 2009 we
expect to bring on additional funds,
both start-up funds and funds converted
www.hedgefundsreview.com

from an in-house system or another

administrator. We expect our client
base to grow by 25%, Andrew Rogers
forecasts.
AIS Fund Administration reports a
gain of over 25% in 2008 but has no
predictions for 2009.
Conifer Securities reports less than
5% of its clients were lost in 2008
due to fund closures. We brought on
many new clients in 2008, supporting
approximately 20% new fund launches.
In 2009, the first quarter is likely
to see an increase in assets under
administration, while the number
of funds we support will be flat to
slightly higher. Our pipeline for fund
administration clients is stronger for the
second through to the fourth quarter

this year, reports Jack McDonald.

David Aldrich at Bank of New York
Mellon confirms hedge fund servicing
business grew overall by over 40% in
2008. We expect balanced growth in
2009, he says.
Northern Trust is cautiously
optimistic for prospects for the sector in
2009, says Ian Headon.
Grant Thornton Fund Administrations
Adrian Hogg says, During the final
quarter of 2008 and so far in 2009
we have established new funds and
sub-funds for existing funds under
administration. Despite the current
economic climate, we see continued
demand for the establishment of hedge
funds during 2009, confirms Hogg,
based in Gibraltar.

Despite the current economic

climate, we see continued demand for
the establishment of hedge funds during
2009. We are confident that 2009 and
beyond will see growth for ourselves
and Gibraltar, Hogg concludes.
We stayed flat in 2008 in terms of
clients lost and clients won, says John
McCann at Trinity Fund Administration.
At a minimum we expect to maintain
this level in 2009, but more realistically
expect to expand our list of clients this
year, predominantly from mandate
transfers from bigger houses who are
not servicing adequately their existing
clientele. We also see a strong pipeline
due to client-led pressure in the
industry to move towards independent
administration.
February 2009 | SPECIAL REPORT | S7

SPECIAL REPORT: ROUND TABLE

Independent admin is essential

Under what circumstances should a fund not outsource its administration?
How important is independent outsourcing of administration for a fund? How much
impact do investors have on a funds choice of administrator? Should investors demand
independent outsourcing of administration?
Independent fund administration is already
common in most jurisdictions. The US is now
expected to join the majority as more investors
are beginning to demand independent valuations
of funds.
I cant think of any situations where it would
not be preferable for some form of independent
administration to be carried out, declares Charlie
Woolnough at Fortis.
Of course if a fund invests heavily in its
administrative capabilities and is able to offer
complete independence to that unit, the fund can
achieve the same operational results as if they
were using an independent administrator. However, even in this situation many investors would
still view internal administration as a possible
red flag. Indeed, it would be wise to appoint an
administrator, at the very least, to shadow the
funds own team, to ensure that standards of
independent pricing remain high, he concludes.
Sharon Grosman and Brendan Conlon at
SGGG Fexco agree that there are no circumstances in which a fund should not outsource its
administration. An independent administrator is
as important as an independent auditor and custodian, they say.
Transparency and independent valuations
are critical for all investors, according to Jos
Santamaria at RBC Dexia Investor Services.
For many institutional investors, this includes
due diligence of not only the manager but also
the third-party administrator prior to investing.
Many investors are now choosing to exercise
some of their influence as ultimate beneficiaries
to ensure that there is an independent administrator, either choosing not to invest or by pulling
their money, concludes Santamaria.
A fund should always use an independent
third-party administrator, according to Andrew
Rogers at Gemini. It is integral to a tri-party
(prime broker-fund-administrator) reconciliation
of the entire fund, he says.
The third-party administrator has the
checks and balances investors should demand.
Knowing the scandals in the past few years that
have been well documented, investors should
demand a reputable, independent administrator to handle the valuation of the fund, says
Rogers.
Various independent services can be provided
to a single fund from the same organisation as
long as appropriate Chinese walls are in place,
points out Don McClean at UBS. Ultimately,
what is important is being able to provide independent services that are solid, reliable, correct
and timely from service providers that the
investors trust, he added.
According to Paul Chain at AIS Fund Administration, there should always be some form of
independence provided by an administrator.
S8 | SPECIAL REPORT | February 2009

Certain large investors can have an impact on

choice of administrator, but most investors come
to the fund well after the choice of administrator
has been made, he concludes.

Keeping it simple
In my view, the concept of service provider independence has become increasingly important as
this avoids the unfortunate incidence of convolution between the service providers, which may
be detrimental to the funds shareholders, says
Kenneth Farrugia at Valletta Fund Services.
The recent crisis in the financial markets coupled with multiple cases of fraud by investment
managers has reinforced the value for hedge
fund managers to partner with an independent
third-party administrator, according to Deborah
Yamin at State Street.
At Capita, Paul Nunan thinks there is a general push away from self-administered funds
and they are seeing more and more institutional
investors insist on an independent third-party
administrator.
Funds should always outsource their administration to an independent fund administrator,
declares Joseph Truelove at Kleinwort Benson.
Investors typically look for a name they recognise and trust and normally like to see that it is
an established player with a reliable parent, he
concludes.
There is increasing pressure to outsource
administration, says Stuart Feffer at LaCrosse.
It is a key control point and while administrators cannot always predict or prevent fraud, they
can make it much more difficult to perpetrate,
believes Feffer.
Peter Hughes at Apex expects all investors
to start to demand independent administration.
Very few European and Asian funds operate
without this currently and the number of fund
blow-ups are significantly lower than in the US,
he points out.
The choice of administrator should be taken
by the board to identify the best-value services
for the fund investors should not have an
impact on the decision. Given the difficulties
some of the larger administrators associated
with investment banks are having, it no longer
means the larger the name, the lower the risk in
choosing that administrator, says Hughes.
I cannot envisage a situation where it is
undesirable for a fund to outsource their administration to an independent third party. The independent third-party administrator lends a high
degree of credibility for managers marketing
their fund, says Jack McDonald at Conifer.
According to Ian Headon at Northern Trust,
the best operating model design is for funds to
appoint an independent administrator. In our
experience, most funds already choose this route

and we expect to see a greater trend towards

independent administration, he says.
Independence is everything, declares David
Aldrich at Bank of New York Mellon. Today
investors demand that the calculation of the net
asset value is verified by a third party or performed by an independent administrator. The
choice of third party is heavily influenced by
investor appetite for strength of balance sheet,
familiarity with the name and background of the
provider, as well as an understanding of whether
this activity is core to the service provider, he
concludes.
Nearly all new funds outsource their administration, says Karen Tyrell at Citi. This allows
the manager to focus on their primary job: managing money. It is also expected by most institutional investors, she says.
A fund should always outsource its administration, unless, for example, it is a family office
with only a handful of family clients, believes
Akshaya Bhargava at Butterfield Fulcrum.
Independent fund administration has always
provided a third-party check on managers.
Without this check, theres no verification that
what the manager says is correct, he says.

Saving money
In this environment it makes even more sense
to outsource, says a pragmatic John Alshefski
at SEI. Companies want to avoid large capital
expenses involved with building or maintaining
technology, system upgrades, disaster recovery
and so forth. Also, in this incredible competitive and challenging market, firms want all their
resources focused on their core competencies
managing assets and servicing clients, he says.
Independent administration is absolutely critical for a fund, declares John McCann at Trinity.
Self-administration seems to be the prevailing
and recurring theme of many of the greatest
hedge fund failures to date. Investors can influence the funds choice of administrator, or lack
of independence at least, by voting with their
feet and redeeming their investment should they
not be happy, he says.
Funds and investors should always consider
outsourced fund administration as best practice,
believes Hans Hufschmid at GlobeOp. For the
fund, a robust, scalable, outsourced administration service will ideally provide traders with a
leading-edge technology infrastructure while letting them focus on what they do best trading
and managing risk, he says.
The concept of service provider independence
has become increasingly important, confirms
Kenneth Farrugia at Valletta Fund Services, as
this avoids the unfortunate incidence of convolution between the service providers, which may
be detrimental to the funds shareholders. n
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SPECIAL REPORT: ROUND TABLE

Savings targets high on to do list

How are costs going to change over the medium and long term? How much is it a factor in
the choice of an administrator? Are we going to see commoditised services?
With assets under administration down significantly in 2009 compared with 2008, the entire
hedge fund industry, including administrators, will be looking for cost savings and a way
to make processes more efficient and effective
without adding expenditure. Some administrators may be less keen to deal with funds under
a minimum assets under management, while this
may help the smaller, more niche businesses capture more market share.
Administration costs are increasingly important, notes Kenneth Farrugia at Valletta Fund
Services. Funds in the sub-50 million bracket
are being hit by relatively high administration
fee minima and this builds a strong case for
funds to be re-domiciled or set up in other more
cost-competitive jurisdictions, notes Farrugia.
Cost is most definitely a factor in a funds
choice but given that investors view the administrator of a fund as a major counterparty, costs
should never the most important factor, states
Charlie Woolnough at Fortis.
Cost are unlikely to fall significantly as most
major servicing mandates have historically been
won in competitive situations so margins are
relatively modest, he notes.
Good service will still attract a premium as will
the servicing of complex funds, predicts Peter
Hughes at Apex. Staff will still be the main cost,
he says. Administrators with lower operating
cost models may be able to charge less, which is
always a benefit to the funds providing the same
services can be received. With the large variety
of fund types and structures it will be difficult
for the service to become fully commoditised,
notes Hughes.

Bespoke solution
A significant proportion of the alternative
investment industry needs a tailored solution,
comments Don McClean at UBS. He thinks largescale commoditisation is not appropriate.
Trust between the investment manager and
service providers is crucial and is dependent
on the relationship and partnership approach
adopted. It is important for investors that they
receive their shareholder statements from a
professional, reliable and trusted source, says
McClean.
Regulation and more requirements will
increase the work of administrators, says
Sebastien at ATU. He expects to see an increase
in the cost in order to cover for the additional
work and risk.
Cost should not be the primary factor in
selecting an administrator, believe Sharon
Grosman and Brendan Conlon at SGGG Fexco.
They say timeliness, level of service, accuracy
and confidence in the administrator are far better
measures in determining which administrator to
select.
Fund administrators that leverage technology
and offer innovative, highly automated services
will continue to differentiate themselves from
providers that use more manual, human-capital
S10 | SPECIAL REPORT | February 2009

intensive processes, notes Matthew Wilson at

Citadel Solutions. Such premium services will
both shape the decision-making process and
enhance customers willingness to pay more for a
broader scope of services particularly as investors increasingly value the security and validation that third-party administration provides,
says Wilson.
I dont see pricing changing, admits Paul
Chain at AIS Fund Administration. This is an
open, developed market subject to competition
and the market has dictated fund administration pricing depending on the level of service
provided. Fund administration is a very difficult
business to execute well, and given the differences in strategies, financing, level of services
between NAV [net asset value] lite and outsourced middle and back offices, there is very
little possibility for the commoditising of this
service. The important point is that this is not
a technology platform but a service, he emphasises.
The pressure to manage costs is greater than
ever, admits Deborah Yamin at State Street. The
advantages of moving to a variable cost model
offered by outsourcing may make more sense
than running an in-house operation with fixed
costs that keep rising due to high IT expenditure. However, fund administrators will be challenged to deliver a high level, but cost-effective
set of services, she notes.
Large administrators are well positioned to
help clients with this challenge by continuing to
make significant investments in technology and
product development and spreading the cost over
many users, concludes Yamin.
For new start-up funds, costs can be a key
factor, says Paul Nunan at Capita. Administrators should have the ability to reduce their minimum costs for an initial period in order to assist
the fund in its launch phase. This will hopefully
help the fund build a track record and ensure that
all parties to the fund benefit from the growth of
the fund, Nunan says.
Over the medium term, he expects to see more
administrators looking at minimum fees to make
sure they cover costs.

Ups and downs

Costs are likely to come down because of the
recession but increased regulation and due diligence requirements are likely to rise, notes Joseph
Truelove at Kleinwort Benson. Given lower
returns and reduced fund sizes in the market, I
feel that managers are already becoming more
cost-sensitive. It is not wise, however, to make a
decision on cost alone, notes Truelove.
Services for equity-only managers and CTAs
are already largely commoditised, believes Stuart
Feffer at LaCrosse. There is very little to discuss
except price. Managers who trade more complex
asset classes generally require more expertise of
their administrator, and therefore put capabilities ahead of price, within reason of course, he
adds.

It is undesirable and difficult to impose higher

fees on funds that are currently under administration, notes Adrian Hogg at Grant Thornton
Fund Administration. Increased costs may be
borne by new funds.
Cost is a factor. However, reputation, regulation, service provision and quality are more significant factors as and when administrators are
appointed, he says.
Costs are likely to remain constant, says Jack
McDonald at Conifer Securities. While cost is
always a factor in any well-informed decision, it
should not be the number one driver in choosing
a critical relationship, notes McDonald.
Akshaya Bhargava at Butterfield Fulcrum
predicts that funds will choose to outsource more
of their back-office services because these costs
may be passed on to investors. As a result, funds
will be able to afford better-quality administrators offering transparency, global reputation and
high standards.
Costs will always be an important topic and
one the industry endeavours to manage, notes
Karen Tyrell at Citi. You pay for what you get.
Of course if a manager is paying a very low/high
fee they should be sure to check on whether or
not they are receiving the right level of service,
Tyrell adds.
Northern Trusts Ian Headon says a hedge
fund manager makes a fund administration
appointment with many criteria in mind and
cost is just one consideration. We have also seen
fund managers require a multiple-service model
across multiple asset classes. In that environment, factors like product coverage, service culture, global model and investor management are
generally paramount, he says.
Costs have risen in Europe, particularly in
Ireland, due to salary inflation and a strong
euro, says David Aldrich at Bank of New York
Mellon. These factors will encourage the use of
additional growth centres for many providers.
Quality of service comes at a cost and provider
selection on the grounds of anything other than
quality is normally a mistake, he notes.
John Alshefski at SEI does not see administration becoming a commoditised business. Theres
always going to be a need for specialised expertise. And being able to provide high-quality services is also a value-add, he states.
GlobeOp does not expect to see pressure on
fees. Hans Hufschmid says fees are a small part
of overall fund management costs. There is even
an argument for fees to go up for high-quality
administration.
Increasing institutional inflows exerts a downward pressure on fees, thinks John McCann at
Trinity Fund Administration. At present, only
around one in six mandates have assets in excess
of $1 billion. Outside this band there remains an
element of a boutique industry characterised by
small businesses where pressure on fees is less
acute, but where fees are still coming down, and
where intangible and ancillary benefits will perhaps supplement revenue. n
www.hedgefundsreview.com

SPECIAL REPORT: ROUND TABLE

Warning of conflict of interest

As large prime brokers and some legal and accountancy firms launch administration
services for large funds, will this cause a conflict of interest?
How might it impact on global fund administrators?
Not all administrators are convinced prime brokers and legal and accountancy firms can undertake fund administration without real risks of
conflict. They are also concerned about thirdparty risk for the funds, particularly if administration and prime brokerage are in the same
place. Others are more relaxed about the possible
competition, although all stress the need for Chinese walls to be tightly enforced.
Akshaya Bhargava at Butterfield Fulcrum
believes prime brokers and law firms and
accountancy firms present an inherent conflict
of interest because its not possible for them to
offer a true Chinese wall. We dont expect many
banks to pursue administration services. The
transparency and operational requirements will
be so costly and demanding that only the most
serious independent players will stay in the
game. Banks that have fund administration as an
add-on service wont be able to compete.
Karen Tyrell at Citi agrees there could be a
conflict of interest but also wonders if these possible new players have the capital, global reach
and capacity to service a broad set of clients
and meet each clients evolving needs as well as
those of the industry. Ultimately, if you are to
be a leading fund administrator you must have
market leading personnel on board, a business
that is 100% behind you and the appropriate controls and processes in place.
Fortiss Charlie Woolnough agrees in part. I
dont think that there is a conflict of interest so
long as the appropriate Chinese walls are in place
and best practice is observed. The key issue for
prime brokers and legal firms is that they typically view administration as an ancillary service
and will often fail to make the necessary invest-

ments in maintaining institutional quality infrastructures, he says. He also thinks many of

these types of firms often fail to grasp the additional qualities of long-standing administrators
(such as restructuring experience) that come into
focus during times of distress.
Sharon Grosman and Brendan Conlon at
SGGG Fexco are unequivocal in their judgement.
They believe most of these entrants will find the
industry more challenging than first expected
and will exit.
Jos Santamaria at RBC Dexia thinks administration services delivered this way are a welcome
addition to the market. Prime brokers are obviously in a strong position to bundle their prime
brokerage and administration services. This will
not necessarily have a negative impact on global
fund administrators. Competition is a healthy
ingredient to ensure a diverse choice of service
provider choices and competitive pricing, he
says.
The potential for a conflict of interest does
not automatically equate to an actual conflict
of interest, says David Aldrich at Bank of New
York Mellon. Service providers always have to
prove their independence of process regardless
of their ownership structure.
Hedge fund managers should have a choice,
says Jack McDonald at Conifer. They should
demand a relationship they feel comfortable
with, a trusted partner. The administrator needs
to understand their business intimately. Where
a given firm offers fund administration in addition to other services, managers should require
that the requisite controls are in place to ensure
compliance with industry standards and best
practices, he concludes.

Fund administration is a competitive business,

observes Ian Headon at Northern Trust. He says
his company competes on the merits of its service
model and client culture. It is for our clients
and their investors to determine the appropriate
administration model for their requirements, he
says.
With the increased scrutiny by institutional
investors and the fact that investment managers
need the ability to work with multiple prime brokers, third-party administrators are even more
important, argues John Alshefski at SEI. The
independence and flexibility that an administrator adds could be compromised by having a
single entity serve multiple functions, he says.
Adrian Hogg at Grant Thornton Fund Administration thinks as long as prime brokers, legal
and accountancy firms are subject to the same
oversight and rules and requirements (with a tangible review process) as global fund administrators, the provision of administration services by
such organisations should not present a problem.
Of the three, it would be important that legal
firms, who are not traditional administrators,
ensure that the personnel and processes of their
administration businesses are appropriate, suitable and correct.
We believe market turmoil in 2008 and the
more recent Madoff events are driving the trend
away from blended service providers to truly
independent fund administration, says Hans
Hufschmid at GlobeOp. One of the new market
fundamentals is increased investor demand for
structurally independent administration services
free from potential conflict or distractions created by other financial activities such as lending
or trading. n

REGULATED PRODUCTS BEGINNING TO GAIN POPULARITY

What are the specific challenges for fund
administrators dealing with Ucits III funds?
With 130/30 funds?
The popularity of Ucits funds is expected to grow
as the interest in regulated products also expands.
Administrators find few challenges in dealing with
Ucits products or 130/30 funds.
We have several clients with Ucits and 130/30
funds, says John Alshefski at SEI. Ucits products
in particular are gaining traction since they provide
managers with opportunities for wider distribution. The
interest in regulated products is also boosting Ucits
appeal, notes Alshefski.
Since the main innovation in Ucits III was the
full eligibility of over-the-counter (OTC) derivatives,
the challenge for administrators has been to apply
the expertise needed to support these financial
instruments, believes Deborah Yamin at State Street.
The larger administrators have had a lot of experience
in this area. If regulators loosen the Ucits restrictions

S12 | SPECIAL REPORT | February 2009

further, fund administrators will need to support a

greater volume of more sophisticated products, she
says.
David Aldrich at Bank of New York Mellon notes
that long-only and hybrid funds present a significantly
different challenge from monthly dealing hedge funds.
This is visible in shareholder servicing, NAV delivery
windows, regulatory oversight and compliance, as well
as tax impacts, he says. Managers are increasingly
seeking an administrator who can demonstrate
expertise across multiple strategies, long, hedge,
regulated and unregulated and all relevant domiciles.
Most administrators fail this test, concludes Aldrich.
In Europe, the Ucits III directive has considerably
expanded the range of eligible instruments that can
be deployed by managers, enabling them to replicate
hedge fund activities, notes Jos Santamaria at RBC
Dexia.
We are seeing an increased number of managers
who have previously launched hedge funds looking

to add more regulated funds to their product range,

says Paul Nunan at Capita. Ucits requires at least
fortnightly liquidity. They have specific investment, risk
and collateral restrictions as well as specific corporate
governance requirements. Many managers new to a
Ucits framework need assistance to understand these
requirements, he notes.
Kenneth Farrugia at Valletta Fund Services has a
slightly different view. He says Ucits III and 130/30
funds bring with them a compliance challenge in
appropriately overseeing and monitoring exposure
to OTC and derivative instruments as well as other
instruments such as illiquid and structured notes.
Both Ucits III and 130/30 funds are perfect examples
of the narrowing gap between traditional managers
and hedge funds, notes Karen Tyrell at Citi. While this
is the ideal way for long-only managers to break into
alpha territory, it also requires an administrator who is
skilled in servicing both areas, she says.

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SPECIAL REPORT: ROUND TABLE

Mistakes could cost administrators

What are the main legal risks a fund administrator faces?
Different views emerge among administrators
over what they see as the main legal risks faced
by the industry. The biggest worry, however,
remains the simple risk of error.
Not all administrators are equal when it comes
to their capability to administer and value the
growing spectrum of investment asset types,
believes Jos Santamaria at RBC Dexia. Without
even mentioning over-the-counter (OTC) derivatives, most third-party administrators can reliably administer exchange-traded and liquid
instruments but even there their service deliverables may vary, notes Santamaria.
The main risk is regarding an error misjudgement in the valuation/pricing of NAV, says
Sebastien Tatonetti at ATU Fund Administrators (BVI).
John McCann at Trinity Fund Administration agrees. The main legal risk centres on mispricing. Currently, for reasons of reputation as
well as legal liability, the vast majority of administrators will steer clear of the actual calculation
of valuations of instruments themselves, he
notes.
Many administrators instead opt for the more
modest task of validating prices recommended
by external specialists such as prime brokers,
exchanges or other external specialist firms.
There is the risk of potential lawsuits, as derivative pricing is more art than science, comments
McCann.
Hans Hufschmid at GlobeOp takes a pragmatic
view. He says the biggest risk is the potential to
be sued, regardless of merit, as a member of a
process chain.

Considering that many hedge funds are valued

at greater net worth than their administrators,
the question of where the legal risk lies is an
interesting one, remarks David Aldrich at Bank
of New York Mellon.
At Gemini Fund Services, Andrew Rogers
believes the main legal risks for a fund administrator are in the valuation of the fund and the
vetting of investors in the subscription process.
As we have seen with additional regulation, the
liability for the valuation of the fund falls upon
the administrator, he says.
It is the responsibility of the administrator to
obtain all pricing for the fund. There are serious
ramifications for non-compliance of the pricegathering responsibilities. Also, a legal risk is the
vetting of investors in the subscription process.
It is their duty to ensure all laws are adhered
to and that the investor is a bona fide individual
or entity allowed into the fund as per the funds
documentation, as well as the laws of the country
the fund is domiciled in. There is merit for action
against an administrator should an investor be
admitted into the fund without meeting all of
these qualifications, he concludes.
Jack McDonald at Conifer thinks that acting
as books/records for a fund invites a certain level
of responsibility and liability. Valuation policies and practices are key to ensuring managers
and investors alike that a given fund administrator is protecting their investment through best
practices of pricing, valuation, accounting and
reporting, he says.
The risk environment for fund administrators primarily concerns the accuracy of the NAV

per share and the servicing of investors share

dealing, anti-money laundering, cash management, explains Ian Headon at Northern Trust.
It remains of paramount importance to us that
we work with clients and funds in a fashion
that facilitates our management and control of
the risk environment in which we operate, he
stresses.
The risks remain the same from incorrect
valuations to fraudulent managers, says Peter
Hughes at Apex.
Obviously, there are individual reporting and
monitoring requirements that change from time
to time as industry best practice and regulations
are modified but at the core are the accuracy of
the NAV and investor services, Headon adds.
Each administrator needs to ensure at the
outset of their engagement that they know their
customer, they understand the requirements of
the client and that they operate within the realm
of their administration agreements, says Citis
Karen Tyrell.
Fortis Charlie Woolnough says the major legal
risks relating to fund administration have historically been those associated with errors and
omissions. I dont really see this changing significantly in the short term.
Adrian Hogg at Grant Thornton Fund Administration believes the greatest risk is valuation of
assets under administration. As the realisation
of assets becomes more challenging, the application of the fair value concept regarding the valuation of illiquid assets is potentially litigious and
is a factor that threatens the fund administration
sector, says Hogg. n

MULTIPLE PRIME BROKERS HERE TO STAY

With the rise of multiple prime
brokers, what are the challenges
for fund administrators?
Many administrators are already used
to working with multiple prime brokers.
With expected changes in the
traditional prime broker model for
the servicing of hedge funds, multiple
trading accounts with several brokers
may become the norm, as opposed
to one prime brokerage account,
says Maria Cantillon at BNP Paribas
Securities Services. The challenge
for fund administrators is the ability
to facilitate frequent changes to the
sources of daily trade, settlement and
holdings files, she notes.
Although some larger hedge fund
managers have been using multiple
primes for years, the average hedge
fund manager has almost all daily
activity reported through one prime
broker, explains Cantillon.
The use of multiple prime brokers
should not cause any significant
additional challenges, believes Charlie
Woolnough at Fortis. It does lead to

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a rise in the number of counterparties

that the administrator has to approach
if issues arise.
LaCrosses Stuart Feffer sees no
additional challenges, adding that his
company has operated with multiprime broker managers since its
founding.
With the increased scrutiny by
institutional investors and the fact
that investment managers need the
ability to work with multiple prime
brokers, third-party administrators are
even more important, advises John
Alshefski at SEI. The independence
and flexibility that an administrator
adds could be compromised by having
a single prime broker serve both
functions, he warns.
The playing field for administrators
really has not shifted that much as
hedge funds move from a single prime
broker to multiple prime broker model,
believes Jos Santamaria at RBC Dexia.
Administrators are already having to
deal with substantially more complex
operating models, with funds having

a proliferation of brokerage and

counterparty relationships, notes David
Aldrich at Bank of New York Mellon.
This pressure can only be relieved
through technology investment in
better-quality systems, he advises.
Administrators have always worked
in a multi-prime broker environment
says Don McClean at UBS. The only
real change recently has been the
greater involvement of custodians.
Deborah Yamin at State Street
agrees but says one of the challenges
for administrators is to streamline
and standardise communications and
reconciliations with prime brokers as
much as possible.
Citi, and any other fund
administrators worth their money, has
extensive relationships with almost all
the prime brokers, says Karen Tyrell.
Successful administrators will need
to be able to efficiently facilitate the
connectivity and reconciliation work
among multiple prime brokers, notes
Matthew Wilson at Citadel.
Northern Trusts Ian Headon says,

Clearly, a larger number of prime

brokers adds to the reconciliation effort
but we see our role as adding value
in so far as we present a consolidated
view of the fund books.
Akshaya Bhargava at Butterfield
Fulcrum says that its systems and
processes are geared to helping hedge
funds manage multiple counterparty
relationships and are already set up to
deal with more than one prime broker.
With the multi-prime trend now the
norm, we see this as a competitive
advantage, he notes.
Hedge funds will expect their
administrators to provide reliable
access pipes to a wide range of prime
brokers, enabling the fund to review
its strategy and execute changes as
circumstances require, says Hans
Hufschmid at GlobeOp.
Trinity Fund Administrations John
McCann says the main challenges are
electronic connectivity, trade capture
and transactional processing via the
disparate IT systems that prime brokers
use.

February 2009 | SPECIAL REPORT | S13

SPECIAL REPORT: ROUND TABLE

Facing valuation challenges

What are the main challenges fund administrators face in verifying valuations to
calculate NAV/AUM? How are administrators valuing illiquid instruments and what are
the problems they face? Will the increase in illiquid instruments be a major factor only in
the short to medium term, or will it have a longer-term impact for future valuation?
The main challenges relate to valuations of private securities, over-the-counter (OTC) securities
and thinly traded securities, according to Sharon
Grosman and Brendan Conlon at SGGG Fexco.
Generally, they say administrators value these
instruments based on the policies set out in the
legal offering documents.
Problems arise when the values provided are
reviewed and are found to be inconsistent with
available information or with values provided by
other investment managers of other funds. This
can lead to tension between the client and the
administrator, they say.
All clients must define a valuation policy by
asset class with a consistent application of that
valuation policy, says Matthew Wilson at Citadel.
This policy must include a dispute mechanism
on how to escalate pricing issues to, for example,
a valuation committee. The pricing policy is a
key control and process document that should
govern the actions of an administrator.
Illiquid instruments present a challenge, given
the lack of available data to verify valuation independently. Citadel has developed relationships
with external pricing resources that increase the
transparency of pricing for all instruments.
The company works with each client during
the implementation phase to ensure that the valuation policy of illiquid instruments addresses
how the valuation should be carried, confirms
Wilson. This includes using specialist valua-

tion agents on a periodic basis and a description

of the model for a particular asset with documented inputs/parameters that trigger valuation
reviews.
According to Andrew Rogers at Gemini, the
main challenge facing verifying valuations to
calculate net asset value (NAV) and assets under
administration (AUA) is the ability to obtain
market quotes. We have found that due to
market volatility there are fewer parties willing
to provide quotes. This is especially true for
illiquid instruments, making it difficult to calculate NAV/AUM on a timely basis. Additionally,
reconciling illiquid instruments with a custodian
is often an issue as they are not often held with
a prime broker but rather with a counterparty,
he says.
The increase in illiquid instruments will be a
major factor in the short to medium term, confirms Rogers. We will see additional regulation on how to value these instruments as they
become more prevalent, which will create a resolution to valuation in the long term.

Lacking consistency
State Streets Deborah Yamin sees the lack of a
standard policy for valuing securities, especially
with illiquid and other hard-to-price instruments
such as OTC derivatives, as the main problem.
While industry working groups continue to
collaborate on consistent pricing standards, the

recent crisis in the financial markets has raised

the urgency of resolving this issue and may
accelerate the adoption of one of the new valuation standards, such as the one proposed by the
Presidents Working Group, she concludes.
Effectively servicing more complex instruments requires investments in niche technology
solutions that can accommodate the life cycle
and valuation of these instruments, says Jos
Santamaria at RBC Dexia. The key to effective
pricing and valuation of all instruments is consistency, says Santamaria.
Don McClean at UBS believes one response
to the valuation challenges posed by illiquid
instruments has been the provision of services
by specialist pricing vendors. What is viewed
as a difficult-to-value product changes over
time. What might have been considered hard to
value two years ago, would not necessarily pose
as many challenges today. However, there are
always new products posing different valuation
challenges replacing those products for which
new solutions have simplified the valuation challenge, says McClean.
Following clearly laid out policies and procedures in a transparent manner is key, advises
David Aldrich at Bank of New York Mellon.
Illiquid securities are primarily a problem for
investors and as the proportion of these has risen
within portfolios they have found that the funds
themselves have proven to be much less liquid

LEANER INDUSTRY EXPECTED TO EMERGE IN 2009

Do you expect to see consolidation of the fund
administration sector in the short/medium
term?
Some of the smaller or more niche providers may
face increasing challenges in this market if they dont
have the right level of infrastructure and technology
to support the increasing transparency, reporting, or
regulatory requirements managers will be seeking,
believes John Alshefski at SEI.
Peter Hughes at Apex believes there will be
consolidation as some of the larger administration
businesses are sold to provide liquidity to other areas
of the banks and there may well be some between the
smaller administrators to improve their offerings and to
survive the current climate.
David Aldrich at Bank of New York Mellon says
consolidation is an inevitable consequence of the
maturation of the alternatives industry.
At LaCrosse, Stuart Feffer believes consolidation is
already under way. GlobeOps Hans Hufschmid agrees,
pointing to a number of large financial institutions
exiting fund administration to concentrate on their core
businesses.
Any time there is market turmoil, a window of
S14 | SPECIAL REPORT | February 2009

opportunity for consolidation opens, says Jos

Santamaria at RBC Dexia. This is nothing new for the
fund administration industry, which has seen significant
consolidation over the past five years. This was primarily
led by global custodians entering the space through
acquisition of independent administrators.
At Capita Financial Group (Ireland), Paul Nunan
expects some consolidation in the short term. This will
be driven by a number of factors. We could see some
of the large investment banks decide to exit the fund
administration market and concentrate on what they
perceive as being their core business. The medium term
will depend on how quickly the market recovers, he
forecasts.
Deborah Yamin at Street says she expects
consolidation will continue because it takes a very
large commitment, deep expertise and significant
ongoing investments in people and technology to be a
top player in the hedge fund administration business.
Yes, I believe large administrators may be
challenged in the current climate and consolidation will
occur, declares Jack McDonald at Conifer Securities.
Administrators that diversify and/or remain nimble will
benefit from this.

Over the five years we have seen a lot of

consolidation. In the short term, I would expect the
market will remain relatively quiet, or at least it will not
be at the same level as it has been, says Karen Tyrell
at Citi.
Ian Headon at Northern Trust says consolidation is
dependent on many industry-specific factors but also
macro-economic factors.
At Butterfield Fulcrum Group, Akshaya Bhargava
expects consolidation with niche boutiques
disappearing, merging or being acquired.
Matthew Wilson at Citadel agrees. Based on the
difficulties facing small administrators with insufficient
budgets to develop strong technology offerings, we
expect to see significant consolidation in the industry
over the next couple of years.
Andrew Rogers at Gemini has a different view. Due
to the recent large consolidation of fund administration
and slow growth, we do not expect to see another large
amount of consolidation in 2009, says Rogers. In the
past few years we have seen many large institutions
buy the smaller, independent administrators and we do
not foresee this trend growing as there are not as many
administrators in the industry to be consolidated.
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SPECIAL REPORT: ROUND TABLE

than they had been led to believe, he says.

Sebastien Tatonettim at ATU Fund Administrators (BVI) says illiquid investments have
always been an issue in valuation and will
always be. One of the issues is the time pressure
to evaluate these instruments. Managers want to
issue their NAVs the next day but illiquid instruments will increasingly delay NAV calculation,
he notes.
We believe that hard-to-value investments will
increasingly require the work of specialist. Also,
there will need to be more transparency towards
the investors so that they are aware of how the
investments are valued and what assumptions
are used. The times where returns were made
without knowing what is traded are over, he
concludes.
Conifer Securities independently prices its clients portfolios daily on the primary exchange,
explains Jack McDonald. Illiquid instruments
are priced in accordance with the portfolio managers valuation policy, supported by the funds
auditor. Obtaining last exit price is a concern
with instruments that are thinly traded for all
parties involved. Of utmost importance to us is
having a transparent valuation policy that is consistently adhered to, he confirms.

Adapting to changes
The growth of private equity funds and the
blending of hedge and private equity will become
more prevalent, forecasts Peter Hughes at Apex.
This will become part of the mainstream fund
industry and administrators will need to evolve
their business models to cater for this, says
Hughes.
The valuation of complex instruments, such
as OTC products, has been under the spotlight
in 2008, notes Karen Tyrell at Citi. There is
increasing wariness of pricing that relies on
counterparties, while some modelling fails to
take account of the quality of the underlying
instruments. For hedge funds keen to retain the
confidence of investors, it has never been more
important to be able to demonstrate transparency of investment pricing, she advises.
Hans Hufschmid at GlobeOp says its fair
market value committee often assists managers
in establishing best practice structures and procedures, in addition to helping funds resolve
pricing disputes. While illiquid instruments
can be complicated, we use best practice, counterparty marks, to mark the portfolio. This has
validity over theoretical pricing of securities
for example mortgages, convertible bonds as
it is an indicator of what someone is actually
willing to pay for an asset, explains Hufschmid.
As we saw in 2008 with collateralised debt
obligations (CDOs) and other instruments,
when the market seizes up, both funds and their
administrators might struggle with valuing
those instruments, notes Akshaya Bhargava at
Butterfield Fulcrum. Fund administrators have
a role to play in valuing illiquid instruments by
helping managers develop and follow clear valuation policies according to industry best practices. In the long run this service provided by the
fund administrators will be a positive long-term
benefit for alternative asset managers, he concludes.

Outsourcing benefits
At Fortis PFS, explains Charlie Woolnough, no
individual vendor has complete market coverage.
We use a basket of specialist third-party pricing
vendors to independently price illiquid assets.
www.hedgefundsreview.com

We believe this approach is ultimately more scalable and more encompassing than any capability
we could build in-house. Indeed, the specialist
vendors have far greater access to the underlying data that is required to price and test stress
models, Woolnough says.
For all investments, but for illiquid ones in
particular, we believe administrators must
understand the valuation process, side pockets,
claw-backs and even tax issues, says John
McCann at Trinity Fund Administration.
Administrators will have to continue to develop
pricing expertise to contribute to the markets
move towards understanding the risks, and
gaining greater transparency. There will also be
greater demands for independent price calculations, and real-time systems that offer comprehensive investment accounting and sufficient
portfolio information, to perform the analytics

necessary for global investment portfolios, concludes McCann.

The valuation policy is set by the manager
and should be specified in the operating memorandum and possibly further delineated in a
written policy. This policy should be reviewed by
the funds auditor and signed off by them. It is
the administrators role to follow the policies set
by the fund and provide independent verification
if that is what the documents call for, says Paul
Chain at AIS Fund Administration. This is one
of the most misunderstood aspects of an administrators role and requires more discussion than
possible in this format.
International Financial Administration Groups
Derek Adler accepts very few funds of funds
unless we are the administrator throughout. We
will not accept funds that we feel are too difficult
to value. n

ROLE FOR BOUTIQUES TO FILL

Do you think niche/boutique fund
administration will be able to survive
the contraction and consolidation of the
industry?
There are mixed views about the ability of
smaller fund administrators to survive.
Charlie Woolnough at Fortis believes the
decline in assets under management will force
a number of smaller administrators out of the
market, particularly if their clients disappear and
they are unable to replace them.
John Alshefski at SEI agrees. He says
the increasing demand on technology and
infrastructure provided by administrators
will put immense pressure on smaller fund
administrators.
Those who do not have the existing tools
to provide services now essential to the market,
such as independent record keeping, daily
reporting and the transparency, whilst also not
having the investment budget available to attain
such technology, will have a challenging time in
this market, he states.
Boutique administrators will have a hard time
for two reasons, concurs Akshaya Bhargava
at Butterfield Fulcrum. First, if they are too
dependent on too few clients, they could
experience a shock if their clients are losing
assets. Second, it will be difficult for these niche
administrators to absorb increases in costs as
a result of a contraction in their assets under
administration (AUA).
Matthew Wilson at Citadel is cautious. He
thinks fund administrators that serve very
specific asset classes and strategies might be
able to carve out niche business. However, given
the demands of hedge funds, including increased
investor scrutiny and decreasing margins based
on declining AUA, Citadel thinks it is unlikely that
small administrators attempting to serve a broad
marketplace of funds will survive on a standalone basis without strong technology offerings.
Karen Tyrell refers to a Citi-sponsored
research report that suggests there is a place
for a number of business models in the industry.
Whether you are a franchise or a boutique to
succeed you must play to your strengths, she
says.
Ultimately, one thing remains constant, she
notes.
Institutionalisation of the alternative asset
management industry will enhance the role of

the large multi-service administrators, believes

John McCann at Trinity Fund Administration,
leaving the niche players to serve the start-ups
and independent boutiques. The industry will
bifurcate, he says.
Consolidation is already underway, says
Hans Hufschmid at GlobeOp, pointing to a
number of large financial institutions exiting
fund administration to concentrate on their core
businesses.
Some will survive and some will not, is
the sanguine response from Paul Chain at AIS
Fund Administration. It will depend on two
issues: their value proposition and their ability
to run a cash flow positive business in a difficult
environment.
Niche/boutique fund administrators will
most certainly survive the contraction and
consolidation of the industry, believes Andrew
Rogers at Gemini.
Jack McDonald at Conifer believes niche/
boutique funds will survive and flourish. We
have seen the largest providers scale back on the
service they provide small/mid size funds while
raising fees along the way. This industry develops
in waves of consolidation. Given the asset
declines of 2008, I suspect you will see further
consolidation this year, particularly among those
providers with less diverse revenue models,
forecasts McDonald.
Peter Hughes at Apex concurs. Most will
survive as they generally offer a more flexible
level of service and a more adaptable business
model. Those reliant on a few larger clients may
find it more difficult than those with a diversified
client base, he says.
Although business is becoming increasingly
concentrated with the larger players there is
always room for a number of smaller boutiques,
forecasts David Aldrich at Bank of New York
Mellon.
Its a balance of revenues, costs and
continuing to invest for the future, says Jos
Santamaria at RBC Dexia. Many are well
positioned to survive as they mainly support
niche trading strategies and select clients, he
states.
Stuart Feffer at LaCrosse says those
administrators able to carve out an attractive
niche with attractive economics will do fine. We
see credit-oriented funds as one such niche, he
concludes.

February 2009 | SPECIAL REPORT | S15

SPECIAL REPORT: ROUND TABLE

Regulation expected to add to costs

What impact is regulatory change expected to have on the fund administration
business in 2009?
Regulators in the US and Europe are pondering
how they can tighten the oversight of what they
see as secretive and unregulated funds. The
fallout from the Madoff scandal is expected to
push US lawmakers to impose new rules on independent administration. Investors are already
demanding greater transparency of funds and
independent valuation.
David Aldrich at Bank of New York Mellon
believes quality regulation is a huge benefit to
service providers and we welcome it. To date,
self-regulation through bodies such as AIMA
[Alternative Investment Management Association] has delivered noticeable improvements in
standards, whereas official regulators have been
reactive and mostly off the pace of the industry,
he says.
Sharon Grosman and Brendan Conlon at
SGGG Fexco believe any new regulation will
be positive for the industry as everyone will be
working within the same framework. However,
the negative impact will be the cost required to
keep up with the regulation.
Sebastien Tatonetti at ATU Fund Administrators (BVI) also believes regulation will have
a positive impact as the US will regulate its
industry. It will mostly impact administrators
that are doing the job at the minimum standard
in order to charge the lowest price, he opines.
New regulation is likely to increase the level of
information disclosure required, says Citadels
Matthew Wilson. Administrators need to be able
to have comprehensive reporting capabilities to
meet that need, he says, adding that administrators will have to embrace the highest standards
of control to minimise fraud or risk of error.
Andrew Rogers at Gemini believes regulation
will have a positive impact because regulation is
bound to increase the transparency of the funds
administered. The negative impact will be the
additional personnel hours it will take to ensure
all the regulations are being met, as well as educating employees on the regulation and verifying
that all the new regulations are being adhered
to, says Rogers.
Some fund administrators may not welcome
greater regulations, believes Deborah Yamin at
State Street. She says State Street is already a
highly regulated company subject to ongoing
regulatory oversight. Any potential negative
impact from additional regulation on other fund
administrators would not adversely affect us,
she says.
Regulation is not a bad thing, says Jos Santamaria at RBC Dexia. Many managers, primarily driven by the corporate culture of the
group and demands from their investor base,
are already striving to a more regulated type of
regime regarding transparency, reporting, compliance and risk management, says Santamaria.
Don McClean at UBS believes administrators have already responded to various changes
including international accounting developments,
regulatory requirements in different jurisdictions
S16 | SPECIAL REPORT | February 2009

and the changing needs of clients and investors.

Responding to change is a regular part of the
fund administration challenge, he says.
In 2009, operators will be faced with additional
regulatory reporting requirements changing
the stance from a self-regulatory approach to a
wider, deeper and hands-on regulatory oversight,
believes Kenneth Farrugia at Valletta Fund Services.
Stuart Feffer at LaCrosse expects there will
be additional reporting requirements to support
disclosures but beyond that not much effect
on administrators per se. Unless, that is, independent administration becomes a regulatory
requirement in certain cases.
Joseph Truelove at Kleinwort Benson says the
work of fund administrators in Guernsey and
Jersey is already well regulated. The positive
element to this is that both jurisdictions have
excellent reputations for fund administration and
sound corporate governance, he says.
We believe increased regulation is heading
our way, says Jack McDonald at Conifer. As an
administrator, I believe we can lessen the burden
our clients face by offering compliance services
as well as staying abreast of current developments. Clients utilising such services wont have
to add to their payroll in order to keep up. The
positive impact from increased regulation will
likely be regaining investor confidence, culminating in additional investment in hedge funds,
McDonald says.

Slow States
Peter Hughes at Apex says the US has always
been the slowest to realise the benefits of having
independent service providers despite most
hedge fund blow-ups coming from the US. Managers are now seeing the benefits of independence and outsourcing middle and back-office
services. Managers are also looking to separate
administration and prime brokerage/custody
functions to different providers for better control
rather than using one provider.
Most jurisdictions regulate administrators
and administrators should be ready to be regulated as they should be operating with good controls and systems, concludes Hughes.
I would think it would lead to a greater
demand for more frequent reporting from administrators, suggests Paul Chain at AIS Fund
Administration.
The evolving EU landscape will continue to
present new opportunities for the most business-savvy as well as protect the industry as a
whole, says Karen Tyrell at Citi. New regulation
usually increases the administrators reporting
requirements. However, this is core to our business and one we are employed to do well a primary reason for our existence.
What is important is for administrators to
keep in close contact with the various national
and international bodies that are considering regulation, she thinks. By remaining well informed,

we can extend our client relation to be more than

just a vanilla fund administrator. Today, it is
about how else you can add value to your clients
business, concludes Tyrell.

More transparency
Butterfield Fulcrum Group sees increased
regulation as a positive development, confirms
Akshaya Bhargava. Regulation emerging from
the 2008 financial crisis will likely require greater
transparency and disclosure for investors and
increased reporting requirements. We have
highly developed expertise in these areas. In
addition, we expect increased regulation to drive
alternative asset firms toward outsourcing as a
means to increase operational capabilities.
Ian Headon at Northern Trust agrees. As
a global firm we are in constant contact with
regulators all over the world and welcome wellstructured, reasonable regulatory oversight that
improves the environment for us, our clients and
our investors.
The effect on administrators will be the
increased need for transparency throughout the
business, says John Alshefski at SEI. In response
to this increased regulation, administrators must
be built to service the regulated products. For
those that do not have this technology already in
place, this will obviously mean implementing the
necessary infrastructure, he adds.
The most obvious impact could be a regulatory-imposed end to internal fund administration, believes Charlie Woolnough at Fortis.
Clearly this would lead to a number of large
mandates coming to the market in the US.
Looking at things from a positive perspective,
any increase in regulation could make the sector
more attractive to investors., concludes Woolnough.
John McCann at Trinity Fund Administration
believes the US will follow the standard model in
Europe where third-party administration is the
norm. Overall, this shift is a very positive regulatory development for the industry. Backlash
from the international regulators in response to
the crisis, such as a permanent short selling ban,
would be seriously detrimental to the industry.
GlobeOps Hans Hufschmid agrees that regulatory demand will increase. From a practical
perspective, its hard to say/see what the regulatory focus should be or achieve. What should be
regulated? How and what would regulators do if
there was an issue? No single hedge fund is now
large enough to create systemic risk, says Hufschmid.
Adrian Hogg at Grant Thornton Fund Administration believes regulation should be positive
and help to protect investor wealth. The negative
impact will be the cost of implementation that
cannot be passed onto the funds under administration. This could reduce the profitability of the
administration sector, which in turn could affect
the quality of persons that the sector is able to
attract, concludes Hogg. n
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SPECIAL REPORT: ROUND TABLE

Variety of criteria used to vet funds

What are the main criteria you use to accept/reject a hedge fund client?
What types of funds do you prefer?
Fund administrators have preferences for the
type of fund they service. However, almost all
of them look for cultural affinity. Top of the list
for all is the ability to service the fund strategy.
At Fortis, Charlie Woolnough says the company is looking to build partnerships with professional, ambitious and successful managers.
Our systems and operating model are such that
we have no strong preference for styles or strategies as we are competently able to deal with
them all, he says. Complexity comes with additional cost he notes. When you look at how the
different fund strategies performed over 2008, it
is apparent that it pays to have a diverse client
base, he concludes.
The principal criteria Trinity Fund Administration uses to accept or reject a hedge fund
client varies. Our philosophy at Trinity is to
partner with our clients and develop long-term
relationships to see them grow their business
successfully, explains John McCann.
First and foremost, we would look at the
quality of the manager in terms of background,
experience, expertise, reputation, etc. Then we
will look at the strategy that they are trading to
ensure it is something that we are comfortable
with in terms of trade processing and pricing
settlement, he says.
Finally, Trinity looks at the fund structure to
ensure that it is in line with industry standards
and best practices. Last, says McCann, we will
look at the seed capital of the product and, more
importantly, their objectives for asset raising
and their track record in relation to the same.
ATU Fund Administrators (BVI) performs
a careful review of the promoter, directors and
employees in order to assess the experience,
credentials, track records and soundness of the
project. It also reviews whether the company
has the capacity and expertise to administer the
fund. We prefer long/short funds and funds of
funds and also work with private equity funds,
says Sebastien Tatonetti.
Capita Financial Group (Ireland) has a new
business committee that meets weekly to signoff on all new business. This includes acceptance from the head of operations, finance,
compliance and legal. This guarantees that the
company can service the client correctly and
that the fund meets all regulatory requirements
(compliance and legal). This process ensures
that we only take on funds where we are confident in our ability to service and we have clients
that we can develop a long-term relationship
with, which is our main preference, explains
Paul Nunan.
AIS has specific criteria for accepting funds.
Paul Chain points out that the prime broker and
its credit committee, audit firm and investors
vet a fund management company. AIS prefers
funds that take seriously the operational side of
the business.
As long as the due diligence is good, we have
no particular criteria, says Derek Adler at Interwww.hedgefundsreview.com

national Financial Administration Group. We

accept all types of asset classes and have no
preference, although we do have a predominance
of futures and derivative funds, he says.

Value in experience
Kleinwort Benson looks for established managers with a strong track record in the particular
asset class, explains Joseph Truelove. Funds
need to be able to demonstrate that they are able
to raise funds and to have raised enough cash to
make the fund economically viable, he says.
Although we have historically preferred
blue-chip, large institutions we have a great deal
of experience and are able to spend time helping
new managers with start-ups once the market
settles down, he adds.
Funds of hedge funds have been a key fund
type to the company over the last 10 years.
Mezzanine and senior debt funds became very
popular during 2008. We only accept business
where we have the systems and staff capacity
to cope with transaction volumes and reporting
complexity, explains Truelove, although he
says the company enjoys getting to grips with
new funds.
We look at each fund manager on their own
merits, says Stuart Feffer at LaCrosse. Primarily, we look for an organisational fit. Are we
good at what they do? Are their prospects good?
Can we agree on equitable economics? he asks.
LaCrosse says it does extremely well with
multi-strategy managers and managers who
trade credit as a key asset class.
Sharon Grosman and Brendan Conlon says
SGGG Fexco conducts due diligence on the
investment manager, looks at the trading
strategy/volume, if there is direct online access
to the prime broker and at the instruments that
the fund trades. The company has no particular
preference on the type of fund it accepts.
Andrew Rogers at Gemini Fund Services says
it is able to service all types of fund strategies.
One of the qualities that we look at in a potential client is an investment manager whose goals
are attainable with the investment strategy that
they plan to implement. As a fund administrator,
we have seen first hand those who have succeeded and those who have failed, he explains.
We want a client who has an appreciation
for the current market conditions and is able to
adapt and overcome the challenges presented by
such. And of course we want someone who is
diligent and looking to do right by their investors, concludes Rogers.
We will accept all legitimate clients irrespective of size as long as their model makes sense
and fits into our risk management profiles, says
Peter Hughes at Apex.
Reputation of the client, including portfolio
managers and top management, is critical to Jack
McDonald at Conifer. Pedigree, track record
and investment strategy are critical elements
to consider. Start-up capital is a requirement,

as well as a demonstrated ability to support the

middle- and back-office infrastructure necessary
to succeed as a business, he confirms.
We service all types of hedge funds, with
various strategies, as well as structures (master/
feeder, stand alone, segregated portfolio companies, etc). In our hiring practices, we ensure
that we cover the spectrum of technical expertise required to offer top-notch services, adds
McDonald.
Citadel Solutions considers a number of factors when agreeing to partner with a hedge
fund. Prior to accepting a client, we consider
the pedigree and level of experience of the managers and the viability of their strategy, says
Matthew Wilson.
This business relies heavily on organic client
growth so we need to believe that the client is
well positioned to succeed, concludes Wilson.
Ian Headon says Northern Trusts primary
focus is whether a client will be a match for its
culture and approach to asset servicing. We do
not have a restrictive tick-box approach to servicing only certain strategies. We are able to work
with potential clients to design solutions for the
most complex of strategies and fund structures
through a largely domicile-neutral operating
infrastructure, he says.
Before we accept a client, says Akshaya
Bhargava at Butterfield Fulcrum, we consider
quality of the manager his/her track record,
reputation and ability to run the fund like a true
business; viability of the strategy is it well
placed and viable in the current market?
The company also needs confidence that
the fund can grow and will continue to receive
investment.
Butterfield Fulcrum has a higher percentage
of complex funds. We seek out funds that want
more of a full-service offering, confirms Bhargava.
We can and do support all types of funds,
but we know we add the most value to managers
that have multiple investment products, or those
that require enhanced reporting and data-management needs, explains John Alshefski at SEI.
The reputation and following of a manager
are critical to their success, notes David Aldrich
at Bank of New York Mellon. Criteria employed
are exactly the same as those used by the most
sophisticated investors, he says.
Grant Thornton Fund Administration will
only accept administration for funds that undertake regular investment business. Adrian Hogg
says the company does not undertake work for
fund wrappers. We also shy away from funds
that maintain a high proportion of illiquid assets
as part of their investment strategy unless such
funds are closed-ended and from fund of fund
structures.
Instead it favours providing administration services for asset managers that actually
manage the assets as opposed to placing the
funds for someone else to manage. n
February 2009 | SPECIAL REPORT | S17

SPECIAL REPORT: ROUND TABLE

Staff stay for career opportunities

How do you ensure that you are able to hire enough quality staff?
If you are outsourcing functions, how do you ensure quality and standards are consistent
and adequate?
One positive aspect of the economic downturn is
less pressure on the employment market. Nevertheless, many administrators are still struggling
to recruit quality staff with the right skills.
Given the market downturn, hiring goodquality staff is easier than it has been. The loss
of business volume due to funds winding up will
inevitably lead to redundancies, says Joseph
Truelove at Kleinwort Benson. I expect there to
be an improvement in the quality of administration and the benchmark for staff retaining their
jobs to be raised.
The company outsources functions to large,
well-managed institutions with recognised
expertise in a particular area, confirms Truelove.
We ensure the quality of the work done by conducting regular due diligence visits and a compliance monitoring programme over the work done
by sub-administrators.
Jack McDonald at Conifer Securities agrees.
In the current market, hiring quality staff has
become easier than in past years. Conifer offers
a broader opportunity and career growth than
others, given the breadth of services we provide.
This translates into a healthy pipeline of talent
for us to choose from, he says.
Hiring quality staff should become easier in
the short term says Peter Hughes at Apex. With
many administrators having funds closing or
shrinking, excess staff are already being made
redundant by some administrators. We dont
outsource functions for the reason you mention
it gives up control of the quality and service
levels, explains Hughes.
Hiring enough staff will not be the problem
this year, says Paul Chain at AIS Fund Administration, but for those of us hiring, quality should
never be confused with availability.
Staff morale is paramount, says Karen Tyrell
at Citi. To give our staff every opportunity they
need, we have in place a comprehensive training
and talent development programme.
On maintaining quality, Tyrell says Citi has
a research development and innovation and
learning (RIDL) centre, which is Citis Irish
training centre and its main primary vehicle for
investment-related research and development
projects. One example of a project currently
under way at RIDL is our work on algorithmic
pattern recognition, she says.
Citi implements a global talent management
programme with bespoke courses to meet the
needs of the staff within each region, explains
Tyrell. An example of this is its Top Gun course.
This course draws on the best business practices across Ireland and Citi to develop delegates
leadership, product-specific knowledge and
cross-business understanding, while providing
the attendees with qualifications, says Tyrell.
In terms of outsourcing, we have in place
a rigorous set of key performance indicators,
service standards with our outsource providers
S18 | SPECIAL REPORT | February 2009

as well as a strong relationship. Altogether, these

are the foundations for implementing and maintaining a consistently strong level of service,
she explains.

Avoid overstaffing
At Fortis, Charlie Woolnough says the company
believes it is not prudent to run its business with
a high surplus of capacity. The current operating climate has confirmed we were correct.
Our approach has been a carefully implemented
policy of forward-recruiting to ensure that any
new business is adequately resourced.
He confirms that Fortis does not outsource
any core function, as it believes it is important
to remain in full control of the main operational
processes.
At Trinity, John McCann says being an administrator is attractive to our staff. It is stimulating and interfaces with some of the best and
the brightest in the asset management industry.
He explains the company spends a considerable amount of time and resources developing
human capital and ensuring the best technologies are used. Our senior staff have been with
the firm on average 10+ years and for our middle
staff the figure is seven or more years, says
McCann, adding that Trinity does not outsource.
Plan in advance and be proactive about managing growth, advises Mara Alido Spencer at
ACE Fund Services. It is important to make sure
that you are fully equipped and have the capacity
to provide the type and quality of services that
you are selling to your clients, she says.
Because the skill set required to support
hedge fund administration is so specialised, we
have been focused on recruiting talented professionals on an ongoing basis. We work very
closely with them to identify specific high-priority positions and the qualifications we seek
in ideal job candidates, says Deborah Yamin at
State Street.
Jos Santamaria at RBC Dexia sees a changing
market. Years ago, administrators recruited
from audit firms for qualified accountants as
the hedge fund industry started to evolve. Now,
because of new evolving strategies and use of
over-the-counter derivatives and structured
products, it is the Quants skill set that administrators need to go after, he says.
He points out that technologies used for valuing exchange-traded assets do not necessarily
work with many of the instruments now being
traded. Administrators today need to supplement existing valuation systems with niche technologies and data feeds, supported by people
who understand the complexities of the investment instruments being traded, he concludes.
Capacity is not a major issue in the current
environment, says Don McClean at UBS. In
relation to outsourcing, he says two of the most
important factors are responsibility and control.

It is essential that a control environment is in

place at the outsourced agent which matches that
of the administrator, that the fund administrator
maintains responsibility for the ownership of
functions, and that the service and quality levels
offered by the administrator are maintained,
notes McClean.

Keep standards high

The recruitment of qualitative staff has to be
driven by a rigorous recruitment process and
an accompanying stringent policy to not lower
quality parameters, believes Kenneth Farrugia
at Valletta Fund Services. On qualitative outsourcing, Farrugia says a number of factors
have to be monitored, including regular onsite
visits, reviews of management letters, processes
and procedures, and ad hoc parallel valuations.
Derek Adler at International Financial
Administration Group says his company has no
problem hiring staff since 95% of our staff is
hired within a 20-mile radius of our main office,
which is located in the Midlands in the UK as
opposed to expensive offshore locations.
Andrew Rogers at Gemini says his company
looks for candidates who are able to acclimatise
to the changing financial markets and those
who are able to overcome the challenges that the
market volatility has produced for example,
additional regulation, difficulty in obtaining
market quotes, financial market swings. If we
have a staff that can handle these unpredictable
factors then we will have a competent, resilient
workforce where quality trumps quantity,
Rogers says.
To ensure quality and standards are consistent, Geminis third-party vendors are made
aware of what is expected from them and are
always expected to perform to that measure,
explains Rogers.
The business model at Citadel is built around
a technology-advantaged service-delivery model,
which means we seek to solve business problems with technology rather than headcount,
explains Matthew Wilson. This also enables us
to focus hiring largely on domain players or innovators in the industry.
He says staff have strong ties to the local markets in which the company operates. This results
in a high level of employee retention.
Citadel Solutions also provides significant
amounts of training and professional development to employees to ensure that domain expertise at the firm continues to grow, says Wilson.
Sebastien Tatonetti at ATU Fund Administrators in the British Virgin Islands relies on referrals from colleagues and contacts. We also use
the service of reliable recruiting firms. Finally,
we also usually fly the person to the island to
meet in person, which allows us to confirm if the
person will fit in the team.
Sebastien Tatonetti at ATU Fund Administrawww.hedgefundsreview.com

SPECIAL REPORT: ROUND TABLE

tors in the British Virgin Islands relies on referrals from colleagues and contacts. We also use
the service of reliable recruiting firms. Finally,
we also usually fly the person to the island to
meet in person, which allows us to confirm if the
person will fit in the team.
Paul Nunan at Capita in Ireland says his company ensures the work is as varied as possible
and that our staff can concentrate on direct client
servicing. The operating model used is clientfocused as opposed to departmentalised. This, he
says, appeals to staff as it helps them learn and
develop their skills. This model also works well
for clients, as staff feel they have ownership of
the client relationship and will typically provide
a higher level of service.
Where outsourcing is used, it is important that
quality controls are put in place and constantly
monitored.
On outsourcing, Capita has service level
agreements in place irrespective of whether
the outsourcing is done internally within the
organisation or externally. It is vital that any
outsourcing is invisible to the end client and that
it does not impact on client servicing, concludes
Nunan.
At SGGG Fexco, staff are hired several months
in advance in anticipation of growth, explain
Sharon Grosman and Brendan Conlon. They say
the company has access to a significant pool of
qualified accounting professionals and university
graduates. The key, according to SGGG Fexco, is

its internal training programmes and low staff

turnover, which creates a rewarding work environment that compensates employees financially
and through career path development.
Fexco also thinks the downsizing of some of
the larger, longer-established administrators has
added to the number and experience of available
candidates.
All outsourcing at the company is done using
a partnership model where both parties have
direct involvement and the opportunity to review
and contribute to processes, controls and functions.
Butterfield Fulcrum believes that by provide
a stimulating work environment and investing
in employees, it will be able to attract and retain
staff. We operate as a global company, with a
global pool of talent, and encourage movement
and career progression between and among
offices, explains Akshaya Bhargava. We
actively promote ourselves within the alternative
community and people are attracted to our transparent and open culture and our strong reputation within the industry.

Invest in training
Bhargava believes the key to ensuring quality
and standards is to offer staff the training, tools
and management support they need to provide
seamless and high-quality service. Our staff
undergo initial and ongoing training to keep
them up to date on evolving standards and best

practices, and our centralised technology infrastructure ensures consistency of service regardless of office location, he concludes.
Northern Trust continuously assesses opportunities for external partnerships or considers
whether its own staff should more appropriately
carry out functions, says Ian Headon. In either
circumstance, with our client as our core focus,
we maintain rigorous oversight over our internal
processes, or external partners or suppliers, to
ensure a quality service.
Adrian Hogg at Grant Thornton Fund
Administration confirms he only hires qualified
accountants for the administration business. The
company also trains staff internally into fund
administrators. We find that qualified accountants have the best aptitude for the job and find
working in the sector satisfying and enjoyable. In
the current climate we anticipate that there will
be more supply of candidates than demand.
GlobeOps investments in people are selective in response to service requirements but
our India operations, where we have two thirds
of our employees, are a focal point for scalable
resourcing, says Hans Hufschmid.
Globally, training is key to service quality,
operational efficiency and customer satisfaction. An example of our continuous investment
in skills development is a transaction-processing
simulator to enable employees to learn technical
skills and GlobeOp processes in a secure environment, Hufschmid concludes. n

INDEPENDENCE IS CRUCIAL
What about the large funds starting to offer
fund administration to other funds? Is this a
threat to traditional fund administrators? Is it a
positive or negative for the industry?
Independence is key, declares David Aldrich at Bank
of New York Mellon. Objective, impartial valuation
of assets and shareholder servicing is now demanded
by investors the world over, not just in Europe.
There is room for many providers at this stage of the
evolutionary cycle, and consolidation will follow in its
own time, he says.
According to Hans Hufschmid at GlobeOp Financial
Services, the Madoff-related events have underlined
to investors and funds why it is essential that funds
are independently administered by service providers
who are uncomplicated by other financial activities
or ownership. Fund client focus is strongest when
an administrators revenues are solely dependent on
administration services.
Now that there is a heightened focus on the
true independence of valuations, safekeeping,
reconciliations, counterparty risk and corporate
governance, funds may question the viability of new
entrants whose core business is not investor services,
says Jos Santamaria at RBC Dexia.
Jack McDonald at Conifer Securities expects
an increased flight to independent third-party
administrators. We rarely see a specific fund offering
administration support to another fund in the
marketplace, nor do we believe that investors will
support that kind of relationship, he says.
Hedge funds have spun out their fund
administration businesses in the past Citadel is a
good example but in the current market environment,
we dont see large hedge funds offering fund
administration to other funds because of the inherent
conflicts of interest. Investors are particularly sensitive
to conflicts of interest right now, points out Akshaya
Bhargava at Butterfield Fulcrum Group.
www.hedgefundsreview.com

Sharon Grosman and Brendan Conlon at SGGG

Fexco do not believe fund administration by larger
funds is a threat to traditional fund administrators but
it is a way for the large funds to leverage the internal
experience they have developed. However, they believe
smaller funds might not be comfortable with larger
funds providing the service because of confidentiality
for proprietary strategies, liability and reputation. They
say many unit holders view the administrator as they
would an auditor or prime broker.
At Trinity, John McCann agrees. I cannot see where
funds perhaps direct competitors for asset allocation
would be comfortable with their peers offering fund
administration services to them, he says. He points
to the same factors as SGGG Fexco as reasons why he
would be surprised to see this taken up in earnest.
Charlie Woolnough at Fortis takes a contrary view.
I believe it is merely a natural evolution as fund
managers look to diversify their businesses and
create additional revenue streams. Despite this,
he has reservations. I believe the days of internally
administered funds are numbered so it will be
important for such entities to prove that they are
wholly independent if they are to attract external
business.
Agility, domain and knowhow of the large funds
translate into a service model where client and service
provider are talking the same language, resulting in
an extremely responsive client service, says Matthew
Wilson at Citadel Solutions. He believes increased
competition is generally positive although it will
inevitably mean that weaker players struggle to survive.
Although some hedge fund managers have ventured
into the fund administration business, State Streets
Deborah Yamin says she has not seen widespread
success, most likely because it presents a conflict of
interest. We believe the business model that works in
the best interest of hedge fund managers who decide
to outsource is one where the fund manager partners

with a truly independent and well-established fund

administration firm, she concludes.
As one of the funds that has started to offer
administration services, LaCrosse believes the
development is positive. We are able to offer a level
of service and an understanding of the fund managers
workings that more traditional administrators are
unable to match, says Stuart Feffer.
At Kleinwort Benson, Joseph Truelove does not
believe this would be a positive for the industry.
Fund promoters are best served by administrators
that have a track record in the asset class, strength
in depth and which are part of a stable and wellregulated organisation. Fund managers have expertise
in managing assets and not necessarily in providing
administration services.
Peter Hughes at Apex has a more sanguine view. If
they are providing a good service offering, then it is
good for the industry as competition benefits the fund
managers and their investors. It is only if they operate
without the proper control and systems environment
that it would be negative for the industry, he says.
AIS Fund Administrations Paul Chain thinks the
biggest issue for hedge fund-owned administrators
is dual business risk. Not only does a hedge fund
considering a fund-owned administrator need to
worry about the survivorship of a new entrant into the
administration business, there is an additional business
risk around the survivorship of the parent and a
legitimate concern about the parent companys possible
lack of commitment to a non-core business, he says.
ACE Fund Servicess Mara Alido Spencer thinks
this type of set-up will become rarer. Investors are
going to have a more scrutinising eye on the type of
funds they invest in and on the providers behind the
fund. They will look for assurance that each party from
the investment manager, legal advisor, auditor and
administrators are independent and accountable in
their own right, she says.
February 2009 | SPECIAL REPORT | S19

SPECIAL REPORT: ROUND TABLE

Industry adjustments expected

What impact, if any, do you expect the economic turmoil, credit crunch and general
volatility of the market to have on fund administrators and their hedge fund clients in
2009? Do you expect permanent and significant changes as a result?
Most administrators expect significant changes
in the behaviour of hedge funds as a result of
restricted liquidity, increased awareness of
counterparty risk and the need for independent
valuations. Many will be looking to outsource
some functions.
GlobeOps Hans Hufschmid believes that
continuing uncertainty in global markets will
hamper the sector in the short term. He also
expects the market fundamentals to yield midand long-term opportunities for top-tier hedge
funds and administrators alike.
Investors and fund managers will place a
sharper focus on risk analysis, collateral management, multiple prime broker and counterparty arrangements, as well as operational cost
controls. Historically, periods of market dislocation have produced value-creation opportunities
for investors and hedge funds, he says.
Jack McDonald at Conifer believes there will
be a flight toward increased controls, transparency and additional reporting requirements.
Increased controls benefit all stakeholders and
I suspect these types of changes would be permanent, he says.
David Aldrich at Bank of New York Mellon
believes the credit crunch will have the indirect
effect of dramatically reshaping the fund administration market, with an increasing emphasis
being placed on the ability of service providers
to withstand external shocks through strong balance sheets and flexible working models. Merger
and acquisition activity is likely to be high over
the coming year or two, he says.
Trinity Fund Administrations John McCann
expects to see a cleaning out of those hedge
funds that leveraged beta on cheap credit and
disguised themselves as alpha pickers.
He also expects true alpha pickers skilled at
trading volatility and liquidity who can manage
risk to prosper. There is a great opportunity for
talented managers moving forward.

Challenging times
The current market environment is proving
challenging for all businesses including administration, primarily as a result of a decline in
assets under management, declares Charlie
Woolnough at Fortis. I believe that performance
could improve significantly in 2009, which could
result in a claw-back of assets later on this year
and into 2010. Hedge funds will invest in moreliquid, easier-to-value assets, which should be
beneficial to administrators, he says.
Using research SEI did in collaboration with
Greenwich Associates before and after the
market downturn, John Alshefski deduces that
institutions are still committed to hedge funds
but are planning increased levels of due diligence and demanding increased transparency
on both managers and administrators.
All parties have to revisit their operating
S20 | SPECIAL REPORT | February 2009

models and costs, believes RBC Dexias Jos Santamaria. In the new environment of tightened
performance and declining revenue, managers
may be more open to outsourcing middle-office
functions to cut costs. Administrators must
balance fund closures and declining revenues
against the importance of people and investment in technology. As always, a new equilibrium will be found which will surely see further
consolidation of the administrator space, concludes Santamaria.

Race for money

Don McClean at UBS believes the money withdrawn from mutual and alternative funds will
remain in hibernation for some time. The
challenge for 2009 and beyond for the investment manager is to attract this money as it is
re-allocated to the markets by creating and providing fund products desirable to investors, he
says.
The administrators challenge, he continues,
is to prepare its service model to be sufficiently
flexible to answer both the demands of any new
regulation as well as clients operational requirements.
Sharon Grosman and Brendan Conlon at
SGGG Fexco think the aftermath of the financial
crisis will add pressure to cost structures on both
sides, increase potential new business opportunities as funds seek to outsource administration
and will increase the pressure on administrators
to provide services in a quicker timeframe.
We expect to see a reduction in the numbers
of hedge fund managers and the values of funds
under management generally, notes Joseph
Truelove at Kleinwort Benson. We expect to
see a return to basics like fundamental analysis
of underlying stocks and more traditional longonly portfolios.
Truelove believes this contraction will also
have an effect on the administration industry.
Some of the later entrants to the market will
not yet have achieved the necessary critical mass
and are prone to failure given the reduction in
numbers of funds and the flight to quality, he
concludes.
Although hedge fund performance was down
in 2008, it still significantly outperformed benchmark indices. This, says Deborah Yamin at State
Street, speaks to the underlying strengths that
hedge funds have, particularly among the industrys top performers.
She thinks large institutional investors recognise these strengths and will continue to allocate
to hedge funds. Fund managers will adapt by
shifting to strategies that perform well in the
current environment, such as global macro and
distressed debt. The trend toward middle- and
back-office outsourcing will accelerate, forecasts Yamin.
There will be fewer administrators in the

industry and not all will survive, declares Peter

Hughes at Apex. Administrators will need to
change their operating models to adapt to the
new environment.
Citadel Solutionss Matthew Wilson believes
the financial crisis will lead to reduced margin
and loss of profitability for fund administrators
that are not efficient and do not sufficiently leverage innovative and proprietary technology. He
also points to increased valuation difficulty for
OTC assets as well as the spectre of increased
regulation of administrators and hedge funds.
Investors will take more care and intensify their
scrutiny of hedge funds and demand for thirdparty validation of books and records, believes
Wilson. He also thinks hedge fund administrators will need to improve automation significantly.
We have seen our investment managers
shifting their strategies and adapting to the
changes in the financial markets, notes Andrew
Rogers at Gemini. As for fund administrators,
we will have to adapt to the changes as well. The
sector will be paying additional vigilance to the
funds that they administer and will be working
to ensure that all regulations and compliance
matters are handled in a steadfast manner, says
Rogers.
It will be difficult for large administrators to
extend their services to small-sized funds driven
by capacity and minimum revenue constraints,
believes Kenneth Farrugia at Valletta Fund
Services. The expense ratio of a number of
funds has increased dramatically, strengthening
the case for the outsourcing of such mandates to
other smaller administrators having a lower cost
base, he says.
Administrators with a heavy reliance on fund
of fund business especially will face extremely
challenging times during 2009, notes Stuart
Feffer at LaCrosse.
Ian Headon at Northern Trust believes the
industry faces heightened challenges around
regulatory requirements, fund structures and
investor transparency. In my view the global
scope of these issues will encourage hedge fund
managers to closely evaluate and seek partnerships with fund administrators who offer global
operating models and expertise, he notes.
Strong and creative managers will successfully exploit opportunities in the marketplace
while the weaker funds may fold with a slowing
of new fund start-ups, predicts Akshaya Bhargava at Butterfield Fulcrum. Driven by investor
demands and increased regulation, funds as a
whole will push for greater transparency and
risk systems, he notes.
In the short term, due to low interest rates, we
see money returning to hedge funds from investors seeking the returns that cannot be achieved
by holding money, believes Adrian Hogg at
Grant Thornton Fund Administration. n
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SPECIAL REPORT: ROUND TABLE

Efficiency and flexibility top agenda

How will technology requirements change over the next 1224 months?
While the economic outlook may not be favourable, fund administrators are considering how
much spending is needed to automate processes
and increase frequency and reliability. Many are
considering their options if expected additional
regulation is imposed on the industry. At the
same time, many expect increased pressure from
both fund managers and investors for faster,
more accurate systems.
One of the advantages of developing and
maintaining a proprietary hedge fund technology
platform, says Deborah Yamin at State Street, is
that the company can be responsive to changing
requirements from clients rather than waiting for
an upgrade from a third-party vendor. In supporting new investment strategies or products,
for example, our operations specialists have
the flexibility and expertise to quickly adapt
technology functionality for straight-through
processing, she notes.
Technology is key both for use within an
administrators operation for outsourcing efficiency and for the delivery of transparency to
investors, says David Aldrich at Bank of New
York Mellon, adding that the investment required
to keep up with the pace will challenge those
without strong balance sheets behind them.
Fund administrators not set up to deliver more
frequent reporting may not survive 2009, forecasts Paul Chain at AIS Fund Administration. If
you are not set up to deliver this, then you have a
hard decision to make on new capital outlays for
technology upgrades in a difficult business environment, he says.
Sharon Grosman and Brendan Conlon at
SGGG Fexco expect web-based access, direct
links to prime broker data and system updates
that increase the geographic regions where services can be offered to top the technology agenda.
Over the next 1224 months, Andrew Rogers

at Gemini expects to see a greater integration of

services on one technology platform. Funds will
want to see all solutions integrated on a single
solution. They will have additional reporting
requirements as the demand from investors for
these solutions will increase as the funds will
required to be more transparent in the future, he
notes.
Increased automation to support the daily
environment will become more prevalent with
new products being made available to allow
investors transparency and access to frequent
valuation, says Don McClean at UBS.
Jack McDonald at Conifer believes fund administrators must anticipate the technology requirements necessary to evolve with new financial
instruments. While the instruments seem to get
increasingly more complex, there is also pressure
to report final net asset values [NAVs] faster. The
portfolio accounting system is the backbone of
the middle and back office and will have to support these requirements.
Not all administrators and technology are equal
when it comes to their capability to value and
account for complex instruments, notes Jos Santamaria at RBC Dexia. Although most third-party
administrators can reliably administer exchangetraded and liquid instruments, he says the technology platforms required to service long/short
funds are now widely deployed with administration delivered by experienced fund accountants.
Leveraging technology to automate manual
processes will be critical for administrators to
maintain profitability and strong margins, says
Matthew Wilson at Citadel. His company leverages proprietary technology that allows its customers to trade any asset class, in any geography
with any volume.
Ian Headon says Northern Trust is planning
technology investment to facilitate the automa-

tion of currently manual processes and to help

the company service clients in areas like frontoffice risk reporting.
At Butterfield Fulcrum, Akshaya Bhargava
expects clients to push for real-time access to
information and straight-through processing.
Clients will expect fully interactive, ready
access to reports for data manipulation, allowing
them to drill down into different aspects of their
investments, he says.
As investment strategies are increasingly converging, John Alshefski at SEI sees a continued
focus on automation and improved technology to
handle hybrid and more complex strategies. Due
diligence will play a much larger role as institutional investors continue to grow their allocations
to alternatives, he forecasts.
Technology will continue to evolve at a rapid
pace over the next 1224 months, says John
McCann at Trinity Fund Administration. There
will be greater demands towards real-time systems, to greater frequency of valuations, to
middle office servicing that will demand technological automation in terms of portfolio analysis
and risk reporting, McCann reports.
Technology will be required to deliver services, systems and reports that increase data
transparency, integrate data from multiple
sources, provide fund managers with real-time
information and execution, flexibility and speed,
says Hans Hufschmid at GlobeOp.
Taking a different view, Joseph Truelove at
Kleinwort Benson expects technology requirements to reduce. There will probably be less
cash around to invest in systems enhancements
in businesses generally. I also expect managers
to be less adventurous in the complexity of
transactions in order to provide investors made
suspicious of hedge funds with greater transparency, he says. n

OPINIONS DIFFER ON 24/7 COVERAGE

How critical is it to have 24/7
global coverage?
Most agree that 24/7 global
coverage depends on the funds being
administered, although the majority
are keen to have at least 24/5 access to
fund administrators.
Global 24/7 coverage is becoming
increasingly important as the
industry institutionalises, says Charlie
Woolnough at Fortis. We are seeing
the emergence of a small number of
global hedge fund firms who require
servicing in multiple time zones. An
administrator can survive by focusing
on a single region, but its clients may
very well outgrow their servicing
capability in due course if they dont
offer global coverage, he points out.
The need for 24/7 global coverage
depends very much on the size and

www.hedgefundsreview.com

nature of the fund client, argues John

McCann at Trinity Fund Administration.
Given the five-day trading week,
weve focused on providing clients
with 24/5 coverage that delivers
daily, reconciled portfolio NAVs every
morning before the markets open
as part of the standard P&L service
package, says Hans Hufschmid
at GlobeOp. This is possible by
optimising time zones with offices in
three time zones UK, US and India,
he adds.
State Streets Deborah Yamin
believes the widespread growth of
cross-border trading coupled with
the interconnectedness of worldwide
financial markets makes it absolutely
necessary for fund administrators to be
truly global with coverage and offices in
all major geographic financial centres.

In a competitive marketplace for fund

services, service level agreements are
increasingly mandating 24/7 coverage,
observes Matthew Wilson at Citadel.
It is important for an administrators
systems to have processing capabilities
in real time. This allows for automated
processes to support global trading,
says Wilson.
So far Conifer Securitiess Jack
McDonald says it is not critical to
our business. He points to the British
Virgin Islands office from which he says
the company is able to adequately
service clients irrespective of time
zone. Technology is an enabler in this
regard.
Citis Karen Tyrell takes a different
view. A cornerstone to Citis offering
is our 24/7 global coverage. Our clients
are global. Our ability to service clients

by teams in Europe, North America and

Asia mean they have an unprecedented
level of control while we are capable
of providing each client with real-time
profit and loss (P&L) information, intraday positions and balances, as well as
cash projections and trading alerts at
every moment, explains Tyrell.
Akshaya Bhargava at Butterfield
Fulcrum agrees. In todays
marketplace, global 24/7 coverage from
an administrator is crucial. In order to
provide a full service, more frequent
reporting with daily NAVs and daily
pricing, administrators need 24-hour
staffing and systems to service the
needs of clients with global interests.
Administrators with staff in multiple
time zones can leverage opposite
work hours to improve service in other
regions, notes Bhargava.
February 2009 | SPECIAL REPORT | S21

SPECIAL REPORT: ROUND TABLE

Industry expects major changes

What is the relationship between the administrator and custodian and how will this
change over the medium to long term?
Following the collapse of Lehman Brothers, more
funds looked to their custodians as confidence
in prime brokers slipped. Most administrators
expect this subtle shift in sentiment to continue
to influence the industry and lead to significant
changes in the relationship in the future.
John McCann at Trinity expects further significant changes in the relationship between
administrators and custodians. Many investment and traditional banks have ventured into
fund administration, thereby increasing the
number of contact points that they have with a
client outside of the areas of banking, trading
and prime broking, points out McCann. Generally these units will be ring-fenced into separate
companies or departments with Chinese walls.
The interests of the ultimate shareholders can
be at increased risk if the principal services are
all from the same financial family (for example,
Lehman Brothers, Bear Stearns). We feel adamantly that there will be a greater drive for
independence and checks and balances between
these two core services which will be client
driven. It is even possible that the regulatory
bodies may consider it mandatory like in South
Africa where these two parties must be from different financial families. As such, one will start
to see the custodians return to their knitting and
prime brokerage and fund administration hived
off as separate businesses all together, declares
McCann.
David Aldrich at Bank of New York Mellon
has a different view. The role of the custodian

is increasingly important partly because of the

need to establish clear lines between the interests
of the financing or secured parties, the manager,
the investor and other service providers to the
fund. Of the blurred lines of responsibility that
were acceptable only a few years ago in typical
Cayman vehicles, these are no longer palatable to
investors, he says.
For fund of hedge fund (FoHF) administration
and custody, the same company often performs
this function, albeit by different legal entities,
explains Charlie Woolnough at Fortis. I do
not envisage this changing dramatically in the
future.
For hedge funds, he sees a greater emphasis
being placed on who is the ultimate custodian of
the funds assets, what rights of rehypothecation
exist over the portfolio and how fund assets are
segregated.
The custodian ensures safekeeping of the
assets while the administrator works on ongoing
administration and calculating the net asset valuation (NAV) of the fund, explains Mara Alido
Spencer at ACE Fund Services.
The historical service model called for the
funds prime broker to also act as the funds custodian. With the turmoil among the traditional
top-tier prime brokers in the second half of 2008,
this service model is now in question, believes
Maria Cantillon at BNP Paribas Securities Services.

Back to tradition
She says many hedge fund managers are now

looking to traditional custodians to provide

segregated custody accounts to safeguard their
funds holdings without rehypothecation, and
to provide collateral management. Although
the traditional prime brokers can still provide
leverage and equity financing with pledged
assets from a third-party custodian, as opposed
to holding those assets in custody as part of
the prime broker service, prime brokers lessen
their ability to provide daily operational support
without a full view of the funds portfolio, says
Cantillon.
Since the 1990s, prime brokers have built up
technology around portfolio-accounting systems
with user-friendly web-based reporting. Many
hedge fund managers rely on this data for their
daily reporting, she explains.
Without the full view of the funds portfolio,
enabled by holding custody of the funds assets,
prime brokers may find it challenging to continue
to provide the expected level of daily operational
support to hedge funds, suggests Cantillon.
This expected change in the prime broker model
is an opportunity for traditional custodians and
administrators to work together to provide a
better product to hedge fund managers.
Cantillon points out that at BNP Paribas the
level of integration between custody and fund
administration platforms allow it to provide
straight-through daily reporting and operational support for hedge funds through a customisable web-based tool.
In certain jurisdictions such as Ireland, funds
must have a custodian from the same jurisdic-

ESTABLISHED JURISDICTIONS NEWCOMERS CHALLENGED

Where are the new or expanding markets for
fund administration? Are new domiciles like
Malta closing the gap with more developed
locations? How is growth in Asia impacting
fund administration services?
We are finding that Cayman-domiciled funds
coupled with Irish servicing is still the leading fund
structure for EMEA-based managers, agrees Karen
Tyrell at Citi. This is testimony to the talent in
Ireland and the legislation of the Cayman Islands.
Don McClean at UBS believes Asia will continue
to provide opportunities for hedge fund managers
while other new centres will find their own niche. In
2009, we anticipate an increase in demand for funds
domiciled in more regulated jurisdictions such as
Ireland. Such funds could become more attractive as
the level of regulatory comfort required by investors
is likely to increase, he says.
At Conifer Securities, Jack McDonald notes that
a number of fund administrators have set up in Asia
over the past few years. Where there is opportunity,
there is growth and competition. The growth in Asia
specifically over the past two years was significant,
creating a shortage of talent, he says.
Regulated vehicles using low levels of leverage
S22 | SPECIAL REPORT | February 2009

will be increasingly popular, believes David Aldrich at

Bank of New York Mellon.
Malta is well placed to offer a cost-effective
alternative to Dublin and Luxembourg being as it
is a part of the EU, suggests Joseph Truelove at
Kleinwort Benson. Given the recent downturn,
however, I feel that the more established locations
will be able to improve their competitiveness.
New domiciles and administration centres are
certain to come to market as alternative jurisdictions
to historical fund locations and administration
service models for example, Cayman- and Dublinadministered, says Jos Santamaria at RBC Dexia.
Domicile and labour arbitrage will always take
place where material opportunity exists and the
workforce is sustainable, he says.
Looking further east, Santamaria says Asia has
shown a dramatic growth in locally domiciled
alternative investment managers. These managers
increasingly want to be serviced in their time zone,
which is seeing Singapore and Hong Kong become
fund administration hubs in their own right as
opposed to simply being a capacity hub for main
operations in the US or Dublin, he notes.
Andrew Rogers at Gemini sees growth in new

markets having an immediate impact on the fund

administration services industry. As these markets
become more desirable and funds choose to invest
overseas, he says fund administrators will have
to become accustomed to working with overseas
brokers, counterparties, banks and custodians.
Fund administrators may see a shift in the way
that they proceed with their day-to-day routines
of reconciling cash and assets and resolving any
discrepancies that they may find. They may even
change the hours that they operate, Rogers says.
In Gibraltar, Adrian Hogg at Grant Thornton
Fund Administration believes the new markets for
fund administration are closing the gap with more
developed locations. He thinks Gibraltar is one
such jurisdiction and expects the territory to see
significant growth over the short, medium and long
term.
Asset managers and investors alike will demand
that funds are managed and controlled closer to
home in jurisdictions with strict regulatory control.
Gibraltar is one such jurisdiction, being in the EU,
having a central European time zone and being easily
accessible from the major European finance centres,
notes Hogg.
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SPECIAL REPORT: ROUND TABLE

tion, explains Don McClean at UBS.

We are seeing two trends within the industry.
The first is the introduction of the custodian into
the hedge fund space. The second is where funds
that previously used one prime broker have now
diversified to multiple prime broker/custodian
relationships, he concludes.
We have always had a close relationship and
are often in contact with each funds custodian,
says Andrew Rogers at Gemini. In the medium
to long term, we think that this relationship will
be one of even more importance and the volatile
financial markets will make it imperative that
each party is working together to ensure reconciliation of the funds assets and cash as they are
essential to the valuation of the fund.
The relationship between the custodian and
the administrator is critical for the fund, the
board of directors of the scheme and more
importantly the investor, says Kenneth Farrugia
at Valletta Fund Services. This is as they jointly
ensure that the fund is appropriately valued, he
says.
Most hedge funds still default to their prime
brokers for the safekeeping of assets, confirms
Jos Santamaria at RBC Dexia. This historical
model has recently come under scrutiny following the collapse of Lehman Brothers.
Many funds have now focused attention
on counterparty risk and the placing of all the
funds assets with the prime broker for settlement
and safekeeping. The past six months have seen
a trend whereby non-collateral assets are being
moved to a traditional global custodian for safekeeping rather remaining at the prime broker.
The focus on counterparty risk will remain a
key issue for everyone in the future, says Santamaria.
One of the biggest changes in the relationship between administrator and custodian is
the recent trend by a growing number of hedge
funds to move their assets from prime brokers
to custody banks, points out Deborah Yamin at
State Street. Counterparty risk is a heightened
concern among hedge fund managers who are
assessing safekeeping options for their cash and
other assets, she confirms.
For fund administrators who are also global
custodians, the ability to combine traditional custody with fund administration services will help
them provide more seamless service delivery to
their clients, she says.
As an organisation with both fund administration and custody teams in two jurisdictions,
Kleinwort Benson understands the value of both
services particularly well, explains Joseph Truelove
We often provide both services to our clients
but we also have strong relationships with some
of the other fund administrators who do not
have an in-house custody team in Guernsey and
Jersey. We are particularly proud of our independent trustee custodian team. There is a need
for both teams to work well together whether
under the same roof or not and I cannot see this
changing, says Truelove.
Sharon Grosman and Brendan Conlon at
SGGG Fexco say they work with the custodian
to simplify their interface. In addition, referrals
go in both directions. Both expect greater contact
in the future.
I think there will be increased segregation
between these service providers to add another
layer of control. Independent administrators
would check all the portfolio pricing but this
may not be the case when the administrator is
www.hedgefundsreview.com

also the custodian feeding prices from similar

sources, believes Peter Hughes at Apex.
The relationship between the administrator
and custodian is critical to seamless operations
for the client, believes Jack McDonald at Conifer.
The administrator must timely and accurately
record and report transactions and resolve any
trade breaks. Importantly, the administrator also
reconciles the portfolio to the records of the custodian, offering a second set of eyes on the portfolio, he says.
Citadels Matthew Wilson believes administrators and prime brokers must work closely together
to ensure that trades are received properly from a
client and reconciled on a regular basis. As more
hedge funds move to a multi-prime environment,
administrators must ensure their processes and
systems support this, he says.

Under the microscope

Adrian Hogg at Grant Thornton Fund Administration takes a more sombre view. The role of

the custodian is currently being scrutinised by

lawyers seeking to recover damages for their
clients in the wake of recent hedge fund failures.
The outcome of these challenges could define the
role and responsibility of the custodian and their
willingness to act for the sector as a result of the
same, he suggests.
Irrespective of the outcome, we are of the
opinion that the relationship of the administrator
and the custodian will become more closely
linked in the medium to long term, concludes
Hogg.
The relationship between the custodian and
the administrator is critical for the fund, the
board of directors of the scheme and, more
importantly, the investor, points out Kenneth
Farrugia at Valletta Fund Services.
Simply put, administrator and custodian
both hold fund records, says Hans Hufschmid at
GlobeOp. They need to ensure that these records
are in synch, for example, reconciled. He does
not expect this relationship to change. n

ALL INVESTORS WANT MORE TRANSPARENCY

How do the needs or requirements of
investors vary? What are the differences
between, say, family offices and
institutional investors?
Family offices typically invest across the full
spectrum of available assets so are often looking
for some form of bespoke reporting that can
consolidate positions across private equity,
hedge funds, funds of hedge funds (FoHFs),
equities, bonds, structured products and exotic
instruments, notes Fortiss Charlie Woolnough.
FoHFs, family offices and institutional
investors tend to be more demanding in terms
of the timing of receipt of information, such
as monthly statements, year-end financial
statements, and due diligence requirements. In
addition, their investments are not considered
sticky, concludes Sharon Grosman and Brendan
Conlon at SGGG Fexco.
Don McClean at UBS is adamant that
investors cannot be pigeon-holed into
institutional or family office categories.
He says it is difficult to generalise about the
services they require. At UBS we service a
range of clients and rarely is one family office or
institutional investor the same as another. The
common theme is their requirement for accurate
and timely information. That is always important
and fundamental to a successful partnership
between client and administrator, he concludes.
Conifer Securities Jack McDonald agrees but
has a slightly different viewpoint. Generally
speaking, institutional investors conduct
the most due diligence, followed by family
offices and then individuals. A given investors
infrastructure and resources in many cases
determine the amount and level of scrutiny
being asked of the manager and service provider.
I believe that in the case of fund administration,
one will see a higher demand for SAS70
[statement on auditing standards] certification
that ever before, he says.
As a result of the Madoff fraud and market
turmoil of 2008, we believe there will be a
trend toward all investors performing increased
due diligence, which may require additional
transparency into their underlying fund
investments, says Matthew Wilson at Citadel.
With more institutional investors entering

the alternative market, there is increasing

demand, and pressure on administrators
for independence of processing and pricing
of complex instruments as well as more
transparency and more frequent reporting,
declares Karen Tyrell at Citi. This is not to say
that family offices do not require the same level
of clarity. Ultimately, having a flexible online
reporting tool that meets all your reporting
needs is key, she adds
Akshaya Bhargava at Butterfield Fulcrum
notes that institutions have become more
rigorous in their operational due diligence and
reporting and transparency requirements. This
will continue. Family offices are increasingly
moving in this direction following major
portfolio losses in 2008. For investors, the
opacity of investment strategies and the relative
lack of liquidity leads to a higher perception of
risk. The only way to mitigate that is to provide
more information and transparency, explains
Bhargava.
Increased investor scrutiny, he says, provides
Butterfield Fulcrum with the opportunity
to demonstrate how our expertise and
infrastructure facilitate the necessary oversight,
objectivity and transparency for investors. In
2008, we foresee more direct contact with
investors, particularly institutional investors, as
they conduct direct due diligence to ensure our
independence and capabilities.
While there are some differences, investor
requirements are increasingly aligned, believes
GlobeOps Hans Hufschmid. Because they are
regulated, institutional investors tend to have
institutional requirements related to reporting,
independence and conflict of interest that do
not necessarily apply to unregulated family
offices. That said, there is a growing alignment
in all investor requirements for greater
transparency as well as independence in terms
of administration, valuation, and verification
and documentation of fund positions, assets and
cash, Hufschmid explains.
Adrian Hogg at Grant Thornton Fund
Administration believes institutional investors
are normally driven by short-term results while
family offices are normally concerned with
longer-term capital appreciation, he notes.

February 2009 | SPECIAL REPORT | S23

SPECIAL REPORT: ROUND TABLE

Industry expands service offering

What new services will be introduced over the next 1218 months?
Administrators plan a variety of services for
the coming months. Most of these focus on providing services that support the main concerns
of the industry, including counterparty risk,
transparency and operational risk.
Administrators that are service-only providers are likely to be challenged, says Matthew Wilson at Citadel Solutions. We believe
the future of administration is in software and
services where access to online, real-time information will provide investors with direct access
to the same systems on which the administrator
is operating, he says.
The role of the administrator will become
increasingly important to funds and their investors in the future. We believe that hedge funds
will require additional transparency into their
data housed on their administrators system.
Static reporting will no longer be an acceptable output of administration, and direct, realtime access to data will become a requirement,
Wilson predicts.
Citadel Solutions says it is rolling out technology to facilitate this direct data access in the
second quarter of 2009.
The company also believes that as hedge funds
expand the number of counterparties and locations where cash is maintained, additional cashmanagement services will be critical for funds.
As margin and collateral requirements increase,
funds will want a service to monitor the margin
and collateral calculations more closely. Citadel
Solutions is rolling out both of these services in
the first half of 2009, says Wilson.
As a global bank, custodian and administrator, we are watching with interest how the
hedge funds/prime broker model will develop,
reveals Ian Headon at Northern Trust. It
remains to be seen whether the use of leverage
will return to the same extent as a number of
years ago, and how hedge funds structure their
products to provide maximum comfort to their
investors around counterparty exposure. We
also expect that we will see self-administered
funds now look to appoint external administrators, he says.
A number of areas in its business are manual,
particularly at the fund of hedge fund level. The
company says it expects some automation in
the execution and settlement of fund of hedge
fund trades, which will improve automation and
reduce errors.
As fund managers attempt to streamline their
own operating models in an effort to control
costs, they will look to service providers to take
on services they believe it is more cost-effective
to outsource, forecasts Charlie Woolnough at
Fortis. I would expect these services to vary on
a case-by-case basis depending on the specific
requirements of the client. However, it is safe to
assume that anything that is labour intensive for
the manager to perform will be a candidate for
outsourcing in the current climate, he says.
At ACE Fund Services, Mara Alido Spencer
expects to see the level of reporting increase in
2009. Administrators are in a position to offer
S24 | SPECIAL REPORT | February 2009

valuable compliance and performance reports.

Funds will rely on administrators to assist with
the preparation of customised reports for their
investors as a way to optimise communication
and reporting, she says.
The future is about managers receiving more,
advises David Aldrich at Bank of New York
Mellon. He expects to see customer-specific outsourcing of a huge menu of services, from additional custody, reconciliation, cash management
and collateral management for derivatives and
for financing.

Outsourcing on the increase

Stuart Feffer at LaCrosse expects to see additional outsourcing services to support operational, middle-office and other non-admin,
non-investment functions at the fund management company. With assets and fees under
pressure, fund managers will increasingly be
looking for ways to make their costs variable
and scale them to the their new economics, he
adds.
In an environment where revenues have or
could shrink, it is unlikely that there will be a
focus on new services requiring capital outlays,
says Paul Chain at AIS Fund Administration.
Sharon Grosman and Brendan Conlon at
SGGG Fexco expect to see middle-office services,
portfolio management systems and web-based
access to predominate.
Gemini Fund Services will introduce an offshore shared trust solution that will provide a
platform that will fully integrate fund governance, compliance and full service administration, according to Andrew Rogers. This solution
is expected to lower boundaries to entry, expedite fund launches and allow advisors to focus
on raising assets.
Independent valuations for private equity
funds will become more common, according to
Peter Hughes at Apex Fund Services.
What investors are looking for, says Don
McClean at UBS, is a solid dependable service
that they can rely on. It is not necessarily about
developing and providing new services, but
rather about the delivery of services they can
trust.
Conifer Securities is currently focused on
increasing the breadth of reports offered to
managers and investors, coupled with the means
of reporting such as increased web reporting,
according to Jack McDonald. The company
thinks the industry as a whole will increase the
support of the middle office, for example, reconciliation.
Derivatives represent possibly the biggest
current challenge to the administration industry,
points out Jos Santamaria at RBC Dexia. The
overall cost of setting up a middle- and backoffice infrastructure for over-the-counter (OTC)
derivatives in todays environment can run into
millions, leading many firms, including mainstream traditional investment management
groups, to view outsourcing as the only viable
option, he says.

However, while there is a lot of interest in outsourcing the derivatives middle and back office,
there are few providers in the market who can
provide a truly integrated offering, Santamaria
says.
Deborah Yamin at State Street says the company has a strong track record of product innovation that includes areas such as collateral
management, risk services and trade operations.
Our operations specialists work closely with
our clients to deepen our understanding of their
funds. This helps ensure that our innovations
are truly client focused. For example, by anticipating increased demand to provide administration support for bank loans, distressed debt and
real estate, we are enhancing our capabilities in
these areas, she adds.
Karen Tyrell says its aim is to continue to
enhance our clients experience by launching
new products, improving the automation and
flexibility of our tools and services as well as
their ease of use.
Citis hedge fund middle-office solution was
launched in December 2008. Using the system,
managers can relinquish their middle-office
responsibilities, including trade operations and
reporting duties, and focus on the core business
with the option to customise their middle-office
solution, explains Tyrell.
Tyrell thinks there may be a jump in the
demand for transparency and market-neutral
portfolio management systems by investors and
larger institutions.
Across the industry, we expect to see
increased risk and client reporting, increased
middle-office services, as well as enhanced valueadded services such as anti-money laundering,
tax services, and liquidity management services
such as projection reports, says Akshaya Bhargava at Butterfield Fulcrum.
John Alshefski at SEI says its focus is on
enhancing existing capabilities to offer a complete outsourcing solution to the investment
manager marketplace. We will continue to
enhance our data-management capabilities, our
daily reporting environment and further develop
our web-based capabilities for managers and
investors.
Administrators will likely gain traction in the
new services, particularly middle-office activities
such as asset pricing/verification of prices, performance attribution, performance monitoring,
risk and compliance, according to John McCann
at Trinity Fund Administration.
Online fund performance reporting to investors will address their demands for performance
data with greater independence, transparency,
speed and frequency, says Hans Hufschmid at
GlobeOp. An increased trend to straight-through
processing, including tools that focus on both
funds and their investors, is expected, according
to Hufschmid.
Adrian Hogg at Grant Thornton Fund Administration says his company does not intend to
introduce any new services to its clients over the
next 1218 months. n
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