Administration, in the context of Alternative Investment and Hedge Funds, (which I will refer to collectively as Hedge Funds in this presentation), means, in effect, the management of the Fund in virtually all aspects of the day-to-day operations of the Fund, except the actual investment of the assets, which is the responsibility of the Investment Manager. In this role, the Administrator is always answerable to the Board of Directors and does not have any actual management control.
In simple terms, an Administrator is responsible for ensuring the efficient operation of a fund, whilst at the same time relieving the Investment Manager from having to do all the boring stuff, such as:
Calculating the NAV and the NAV per share or unit, as often as may be required by the Fund or its Board. That may be daily, weekly, monthly or quarterly. Usually Hedge Funds have monthly valuations, however, as institutions become more and more involved in these markets, so does the demand for more frequent valuations;
Keeping the accounts and financial records;
Preparing the annual audit file and liaising with the Auditor;
Liaising with the Investment Manager or Advisor, the Custodian, the Brokers and other service providers;
Liaising with prospective investors and sending out the offering documentation;
Calculating, confirming and arranging payment of all subscriptions, redemptions, fees and expenses, and arranging for the payment of all dividends or other distributions, if required;
Maintaining the statutory books and records;
Usually the Administrator will also act as Registrar & Transfer Agent, handling the registration of shares and liaising with shareholders with regard to subscriptions, redemptions and transfers; and
Carry out anti-money laundering due diligence with regard to investors;
The Administrator may also act as Company Secretary - and will therefore be responsible, amongst other things, for arranging Board Meetings, calling the AGM and preparing Board Minutes.
The Administrator will maintain a copy of the Share Register at its office and, if the Administrator is not resident in the domicile of the Fund, ensure that the original Share Register is held in the Registered Office in that jurisdiction;
If the shares of the Fund are listed on a Stock Exchange, ensure that the Company and the Directors comply with the ongoing obligations of the relevant Stock Exchange;
And perhaps most important of all, the Administrator will be the interface between you, the Manager and Investors;
Depending on the terms of its agreement, the Administrator may also be responsible, for ensuring that the Fund complies with the terms of its Offering Memorandum in many ways, including the management of its investment portfolio with regard to, for instance, investment restrictions and diversification requirements.
This is not an exhaustive list of an Administrators duties but should give you a reasonable idea of what is involved.
In summary, as I said, an Administrator should be responsible for making sure everything is done to enable the fund to run efficiently in all aspects, except the management of the assets - that is the Investment Manager's task. Thus an efficient Administrator will enable the Investment Manager to sit in his ivory tower and make pots of money, without distraction.
In the Hedge Fund industry, I suggest that the main advantage that the third party Administrator brings to the table is the comfort that is provided to investors, if the administration of a Fund, and particularly the calculation of the net asset value (NAV) of that Fund, is being carried out by an independent third party (that is independent from the Funds Manager), using independent prices and transaction data sources when calculating the NAVs.
Why do I stress this Let me briefly explain - the majority of Hedge Funds, of which there are now several thousand some estimate close to 6,000 - are established in the United States as Limited Partnerships. As I have already said, General Partner is usually the Hedge Fund Manager and also, usually, handles the administration of the Fund and produces all of the partnership accounts, reports and statements. In the vast majority of cases, there is nothing wrong with that and, historically, the vast majority of US Hedge Fund accounts and reports have been spot-on.
Please remember that I am talking about Hedge Funds, which are, on average, very much smaller than the average retail fund. Very few Hedge Funds are over half a billion dollars. This is because many, indeed most, Hedge Fund strategies are capacity sensitive. The other day I heard a UK Fund Manager described as small, in the context of the European retail market, at ten billion dollars I would be surprised if you needed more than two hands to count up the number of Hedge Funds Managers with over five billion, let alone ten billion, dollars under management.
However, as those whose knowledge of this market is based on the somewhat sensationalist, and, frankly, ill-informed, articles in the press over the past couple of years (including, rather disappointingly, at least one article in The Economist) they will know, there have been a number of scandalous frauds involving US Hedge Funds. I would point out, in passing, that these frauds represent a tiny percentage of the universe of Hedge Funds and an even smaller percentage of the asset pool invested in those Hedge Funds. Unfortunately, these small percentages seem to be in inverse proportion to the column inches that the scandals apparently merit in the press.
Be that as it may be, the reports of these scandals have honed investors senses and, because the majority of these frauds involved self-administered US Funds, those Investors now want to see that the Funds they invest in are administered by an independent third party Administrator. Therefore, I believe that the appointment of a third party Administrator can add immeasurable value to a Fund, if it means that it will retain investors in the Fund or, indeed, attract new investors to the Fund.
For a small or emerging Hedge Fund Manager, setting up his first fund, the cost advantages of appointing a third party Administrator can be easily demonstrated, but it is not just a matter of pure dollars and cents.
Until the Fund grows in size to, at least fifty, or even one hundred million dollars, which is above the average size, the actual cost of setting up an administration facility - (which involves renting more space, employing qualified staff, acquiring the specialised technology and providing the managerial resources required to ensure the efficient self-administration of the Fund).
These costs can be almost prohibitive and are unlikely to compare favorably with the fees charged by many of the specialist Hedge Fund Administrators or at any rate those Administrators who will accept the smaller start up Hedge Funds.
Obviously, once the Fund has reached a critical mass, the cost ratios change and the attraction of a third party Administrator may decline. However, it is also likely that, as the Fund grows, the fees charged by the Administrator will also be volume sensitive.
So, it can be seen that the decision to use a third party Administrator is not necessarily cost driven and can be swayed by other considerations, such as the perception of independence that I have already mentioned, and risk transfer.
By this I mean transferring the risk, and resulting liability, represented by, for instance, the possibility of expensive administrative errors, from the Fund Manager to the third party Administrator or that Administrators insurance company.
One area where dollar costs can be a serious factor is when a Fund Manager, who has hitherto administered the Fund that he manages, decides, perhaps because of investor pressure, to appoint a third party Administrator. In these circumstances, the Manager will already presumably have made a substantial capital investment into his own administration department and that department and the technology purchased, may have proved very efficient.
In choosing to outsource the administration, the Manager may, on top of paying the new administration fees, have to decide to write off the capital investment and let some staff go. And, as we all know, in Europe at any rate, that can be a very expensive way to cut costs.
Often in these circumstances and in order to avoid these write-offs, the Fund Manager may decide to continue preparing the Funds accounts and calculating the NAV.
At the same time, the Manager will try and appoint a third party Administrator to fulfill the function of verifying the figures produced by the Fund Manager and, of course, to do that for a nominal cost. This is what is known in Hedge Fund circles as NAV Lite. Obviously, this is, potentially, a very dangerous area for an Administrator and any Administrator who agrees to verify such numbers and be described as The Administrator in the Funds documentation, should, in my view, still replicate the whole accounting process, in-house, using independently sourced data, which, of course, cannot be done for a nominal cost.
Having said all that, in many jurisdictions, it is now a requirement that an independent Administrator is appointed for most Funds, obviously excluding those managed by the larger Fund Managers who have their own separate administration company Fidelity, Citigroup, Barings all spring to mind and, of course, many such huge companies also act for both their own in-house funds and outside funds.