The world of fund administration took a new leap, especially in the US, soon after the Bernard Madoff scandal. And when Union Bancaire Privée and Banque Edmond de Rothschild, the Swiss banks, threatened to withdraw assets from US hedge funds that didn't use full-time independent administrators, that was the final nail in the coffin. The UBP and Banque Edmond de Rothschild announcements sent a strong signal to US hedge fund managers to either retain an independent administrator or risk losing investment from pro-hedge fund institutional investors.
This call was particularly noteworthy, as UBP, through its funds of hedge funds and clients' managed accounts, is one of the world's largest investors in hedge funds, with USD124.5bn in assets at the end of June last year.
In fact, one hedge fund manager with which UBP invests, Millennium Management, moved straightaway to appoint an independent administrator, recognising that for investors this is, or is perceived to represent, an added safeguard against fraud or mismanagement on the part of the managers.
As hedge fund and fund of fund investors gear up to limit their risks in the troubled environment that is now, the onus is on hedge funds to protect their assets. This is more indicative of US funds rather than their European counterparts, as the vast majority of offshore (from the US) funds, and certainly those with European managers, already use independent administrators and it is already a precondition for many investors.
It goes without saying that other investors are also following UBP's lead, which in turn is giving an additional fillip to the fund administration sector. And consequently, large fund administration jurisdictions like Ireland are also benefiting. At the same time, The Alternative Investment Management Association (AIMA) and the Hedge Funds Standards Board have long been urging managers to deploy some type of independent oversight to give an extra sense of security in valuing their portfolios.
Fund administrators are becoming increasingly important given the turbulent times that surround us. In the long run it is always better to be safe than sorry. Independent administrators fulfil various key functions for the industry. Apart from providing independent fund valuation and net asset value (NAV) calculations, many also provide additional services such as day-to-day duties associated with running a fund, shareholder record services, accounting, performance measurement and legal support.
In the new era that is emerging, there is bound to be a significant shift in the way hedge funds will manage their infrastructure and operations. In a bid to maintain investor confidence and attract new investment capital, more hedge funds are moving, and will move, towards independent fund administrators.
Outsourcing of fund administration can be relied upon for independent verification and valuation of the assets managed, apart from other valuable services that are provided. The new environment has instilled the need to be safe rather than sorry. Independent fund administration is the way forward.
Dermot Butler, Chairman, Custom House Global Fund Services Limited