Investor demands drive service evolution
Two significant trends are well underway in the hedge fund arena. Investors, primarily institutional, no longer look solely to the investment manager before making large commitments to alternative investment products. Many now require that investment managers utilise the services of independent organisations for some or all administrative services - a third-party, independent review that provides a higher comfort level for these investors.
Many investors are taking the due diligence process one step further by assessing the capabilities of the independent service providers either through requests for information, on-site visits, or more likely, a combination of the two. The second trend is the requirement that performance and investor account reporting timeframes virtually be cut in half.
Outsourcing of administrative services is now driven by a combination of investor dictate and the economies of scale that thirdparty providers offer. At U.S. Bancorp Fund Services, we administer virtually all types of alternative products; however, we have carved a niche in a very complex arena,focusing on structured fixed-income products such as municipal, fixed-income and convertible arbitrage, CDOs and CLOs. Investors in these products, who tend to be institutional or high net worth individuals, are the drivers of the extended due diligence process. Over the past 12 months, we have seen numerous requests for information from potential investors and hosted several site visits. Both focus on critical processes and procedures at the service provider, not unlike those required for mutual funds under SEC Rule 38a-1. If the service provider does not pass muster, the investment commitment will not be there.
These same, highly sophisticated investors, as expected, are demanding more frequent and timely dissemination of performance and account information. Gone are the days of providing account statements on the 15th of the month following the applicable period. That timeframe is more likely to be seven days - and investors expect and demand interim performance estimates and estimated month-end performance reports by the third business day of the following month.
As service providers step up to meet these demands, the communication flow among them, investment managers, prime brokers, corporate trustees and others must and will improve. An advantage USBFS enjoys in the niche we have carved, the structured fixedincome arena, is that U.S. Bank is one of the largest corporate trust services providers in the US and is the largest in structured finance. Much of the critical communication is housed within one organisation.
Service providers are also meeting the demand through improved communication and review of their internal controls and procedures. Many service providers have had independent auditors review their controls and issue SAS70 or other reports regarding the operating effectiveness of those procedures. Service providers are also being called upon to issue certifications regarding critical procedures and significant events to investors and investment managers.
In the past, operational reviews and communication flows were among investment managers, service providers, brokers, custodians and others performing critical functions for the fund. Now the investor has been thrown into the loop, and service providers must grasp and welcome the need for increased interaction between themselves and the investor.
Christine Waldron is a vicepresident and manager of alternative investment products at U.S. Bancorp Fund Services
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