Investors increase scrutiny of administrators

Operational due diligence should now include sophisticated analysis of administrators’ controls, systems and workflows

Sophisticated investors are devoting more time to scrutinising administrators. Reflecting the administrator’s increased importance to the industry, a large part of operational due diligence (ODD) now focuses on administrators’ systems, as well as detailed descriptions of workflows. The time involved, and magnitude of the task, has become similar to the research historically performed on investment managers.

But as the nature of queries evolves, and their depth increases, so specific areas of ODD scrutiny are becoming clearly defined.

Data transparency

Investors often request portfolio position reports, both before investing and throughout the lifecycle of their investment, while respecting the need for confidentiality around portfolio holdings. Their reviews range from assessing portfolios for style drift to detailed risk analysis. While some investors have in-house teams with sophisticated risk analysis techniques, others commission third-party risk specialists to report regularly.

Regardless of which route they choose, investors increasingly source the data for their analyses directly from administrators. And, more often than not, they want to aggregate these analytics across their investments, by requiring service providers to provide ODD details in a bespoke and common format.

Segregation of controls

The extent to which funds make use of the administrator’s expense payment and treasury services facilities for additional layers of control, in addition to the standard two signatory requirements, remains a point of interest. Investors ask about the administrator’s review of fund expenses. They seek confirmation that a fund’s expenses are as outlined in the fund documents, and that the nature and ratios of expenses are in line with industry practice.

Engagement with service providers

Once investors understand control procedures and workflow specifics within administrators and other service providers, they look into the investment managers’ levels of contact and engagement.

Questions relate to: data handoff and associated cyber security, number of levels of review between the organisations, frequency of meetings with service providers, levels of reporting and contact with the funds’ boards of directors.

Culture of compliance

‘Tone from the top’ is a common alternative investment topic, which is also an important part of due diligence. Investors choose to judge this subjective quality through interviews with investment management firms’ key partners. But investors are also visiting administrators more frequently and interviewing key personnel, as well as reviewing control process documentation, SOC I reporting summaries and other key compliance-related protocols.

Looking forward, this ratcheting up of ODD reporting is set to intensify. Requests to administrators and other service providers already focus on levels of transparency, robustness of service provider infrastructure and demonstrations of a culture of compliance. In future, further demands for data, control environment details and service management workflows are to be expected.

In response, investment managers, administrators and all other service providers are applying dedicated processes and resources to respond to ODD enquiries accurately and efficiently.

19th September 2014

Our contacts

Claudia Bertolino

Claudia Bertolino

Head of Business Development,
Citco Fund Services (USA) Inc.

T+1 212 551 3251
LNew Jersey, USA