Wed, 08/02/2006 - 06:13
The fourth of a six-part guide by Dermot S.L. Butler, Chairman of Custom House Administration & Corporate Services Limited (Custom House).
How to go About Selecting an Independent Administrator - Due Diligence or What to Look For and What to Ask.
Before you can select an Administrator, you must have an absolutely clear understanding of your requirements - what you want, or, perhaps more to the point, what you need. This comes down to 'What to Look For' and 'What to Ask'. Before you can make any decision on these, you must carry out your own due diligence.
Whereas almost all Investment Managers would expect any sophisticated investor to carry out serious in-depth due diligence, on the Manager, on the Manager's trading techniques, past performance, checking references, reviewing systems, in fact delving into everything, those same Investment Managers, when acting as promoters of funds, often do not carry out even the simplest due diligence when selecting an Administrator, other than getting a fee quote - due diligence is in fact essential when choosing an Administrator.
To do this, you need to ask the candidate Administrator to complete a detailed Questionnaire. If, having received and reviewed the Questionnaire, you decide that this candidate is still in the running, you then need to carry out further checks and assessments including:
· Get references and be clear about what the references say - and what they don't say. When getting a reference, it is often better to call the referee, because they may say something "off the record" that they would not commit to writing.
· Next, as a trader, you would normally "check your market". Do the same when selecting an administrator. That is to say, look at more than one Administrator - hold a beauty parade - find out what they offer.
· You should visit their offices and see what they do and how they do it.
· You should, quite soon, have a pretty clear idea whether they are able to offer a personal service and whether you are going to be allocated one named person as your account executive (preferably backed up by another named person), or whether you will be an anonymous account. Basically you have got to find out if you are going to be treated as a person or as a number.
· Ask the Administrator how many clients they have in total and, more importantly, how many clients do they have that invest in the same asset classes, sectors or disciplines as you do.
· If you are dealing in an exotic instrument, and the Administrator has never handled that instrument, then you must ensure that it is capable of doing so. The fact that it hasn't handled the instrument doesn't mean it can't, although it would be added comfort if you know, from day one, that the Administrator has other accounts that deal in the same instruments as you do.
· Review the Administrator's standard agreement and get a detailed procedures manual - a term sheet if you like - to explain exactly what the Administrator is going to do and (and this is very important) who is responsible, in which office, for each specific task.
· Find out what are the qualifications of the Administrators' staff - how many professionals do they have - previous employment history etc.
- You should be aware that the Administrator also has certain fiduciary responsibilities to investors, for example overseeing and verifying valuations and being able to justify them. Find out if they are capable of carrying out esoteric valuations if required.
· The Administrator has similar responsibilities with regard to ensuring compliance, by the fund and the Board of Directors, with relevant regulations and, particularly, anti-money laundering regulations. Find out how they handle this.
· Can the Administrator handle Equalisation?
Your first step should be to send to your shortlist of Administrator candidates, a detailed Questionnaire, which should ask many of the questions highlighted above, as well as many more.
AIMA - the Alternative Investment Management Association - has published guidelines for Due Diligence Questionnaires for many different participants in the Hedge Fund industry. These include suggested guidelines with regard to questionnaires for Administrators that might be issued by both Managers and Investors. These and other Due Diligence Questionnaires, including questionnaires for Hedge Fund Managers, CTAs, Prime Brokers and Funds of Funds are available to members of AIMA, see www.aima.org for further details.
The answers to that Questionnaire and the visits and other recommendations made earlier, should enable you to select the winner of the beauty parade.
Finally when you have finished the beauty parade - don't go for the cheapest, go for value.
Remember, an Administrator should add value to a fund, and the more you want your Administrator to do, then the more it will cost. Even in today's high-tech environment, administration is a labour intensive business and everywhere that Administrators operate, labour costs are rising.
There is a great tendency to assume that Administration is a simple bookkeeping task and that the Administrator that can do it cheapest, is the one you want. Rest assured that this would almost inevitably turn out to be a totally false economy.
Dermot S.L. Butler is Chairman of Dublin-based Custom House Administration & Corporate Services Limited ("Custom House"), a company that specialises in assisting clients in the organisation, establishment and administration of alternative investment and hedge funds. Custom House is regulated by the Irish Financial Services Regulatory Authority ("IFSRA"), and authorised under Section 10 of the Irish Investment Intermediaries Act, 1995.
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