Transparency and control builds trust

Accurate, timely NAV figures and clear processes are enabling administrators to work increasingly closely with funds of funds

It’s no secret that because of declining assets and pressure on fees from institutional investors, fund of hedge fund managers’ margins are being squeezed. But as they respond by seeking to cut operating costs, they’re being forced to rely on third-party administrators far more than before, putting trust at a premium.

The fund of hedge fund industry received some long awaited good news over the winter holiday season, with assets under management within this strategy increasing by 3.7% to $1.23 trillion in the 12-months to October 2015*. Fund of hedge funds also contributed to 3% of all new hedge fund launches during the same period.

However this should not obscure the fact that fund of hedge fund assets have fallen steadily since 2008. Fund managers in this space continue to suffer from redemptions as pension funds and other institutional investors move the task of allocating to hedge funds in-house, or hire hedge fund consultants to do the job for much lower fees than a fund of hedge fund manager.

In order to remain competitive within this changing industry landscape, an area that hedge fund managers look to for generating greater efficiency is eliminating the practice of shadowing the administrator’s NAV calculation, and the in-house pricing of underlying fund of hedge fund portfolios. This trend is set to continue, as a recent survey by PWC revealed that at least 50% of hedge fund managers now outsource these middle office tasks to third-party administrators.

Reducing the size of the middle office

One of the world’s largest multi-strategy hedge fund managers, which recently outsourced its fund administration services and increased oversight tolerance thresholds on third-party administrators, was able to reduce its middle office workforce by 80% by adopting this approach.

Shadowing duplicates the work performed by the administrator, but managers have historically been reluctant to trust administrators entirely with such a critical task. Instead, they have performed it in parallel, checking the administrator’s calculations.

But this is changing, and not just because margins are being squeezed. As the fund administration industry continues to mature, a few of the top-tier administrators have perfected the art of striking an accurate and timely NAV. They are also developing more detailed service level agreements and workflow technology that give hedge fund managers the required level of transparency and control to effectively monitor their outsourced activities.

As the growing number of fund of hedge fund managers have cut back on shadowing in order to reduce costs, they have had to overcome their inherent lack of trust of third-party fund administrators. Arguably, only a few administrators have the people and technology that can deliver a quality NAV to gain that trust.

The more client-service focused fund administrators are also now providing greater insight into their management of books and records than ever before, making it easier for their clients to trust what is being delivered. To hold themselves accountable, the best third-party administrators have also introduced more relevant key performance indicators with delivery thresholds embedded in service level agreements. The distribution of management reports has also become far more transparent and efficient.

Real time reporting is key

At the heart of this lies management reporting technology solutions, such as CitcoOne. It will publish KPIs and SLAs, as well as exceptions, and has the ability for users to query data on a real-time basis.

Citco has seen a number of its clients trust it to administer their funds of hedge funds without the need for shadowing. Experienced people and advanced proprietary technology have helped it to grow assets under administration whilst the sector has plateaued. At the end of October 2015, Citco’s fund of hedge fund assets under administration grew to US$153 billion, ranking it the largest global administrator in this area*.

* HFW: 25th Biannual Assets Under Administration Survey, 2015. Preqin Quarterly Update: Hedge Funds Q3 2015.

10th March 2016

Our contacts

Giovanni Maso

Giovanni Maso

Product and Business Development,
Fund Services

T+1 201 793 5500
Egmaso@citco.com
LNew York