By Ken Somerville, Senior Director, Fund Accounting, PFPC International
Over the past few years, the outsourcing of hedge fund administration has been a fast-growing business, for two reasons. While it enables managers to focus on their core competency of investment management, it's also highly palatable for investors because it provides reassurance that assets are valued in an independent way and that the manager does not have any discretion over how returns are calculated and distributed.
This supervisory function, which includes liaison with other providers of services to a fund such as prime brokers and other counterparties, is extremely important, but the complexity of many hedge funds calls for a high degree of skill and expertise. Institutional managers in particular set very high standards of due diligence in areas such as reconciliation of assets and valuation.
A key goal for administrators in recent years has been to minimise the amount of human re-keying and manual intervention required to construct the fund's books and records. Administrators in the Dublin marketplace subscribe to standards of best practice that call for the use of the best available technology to meet the standards of service managers - and regulators - require.
Many leading providers in Dublin opt for the use of 'best of breed' technology. This means adopting the best solutions on the market for each of the core business areas we cover, instead of obliging clients to accept a solution based on proprietary software.
These key activities for administrators, distinct although related, comprise investor servicing (liaison with fund investors and maintenance of the register of their interests); administration (net asset value preparation); and 'middle office' (liaison between the manager and the prime broker or custodian of a fund to facilitate delivery and settlement of trades).
In fact, PFPC does use proprietary software developed by its parent, the US financial services group PNC, for traditional long-only business - but only because this in-house system has been determined to be the best of breed, selected on exactly the same basis as third-party systems.
This philosophy is shared by many of our leading competitors in Ireland. It obliges everyone to perform to a higher standard and provide a better service to clients, something that's essential for the continued growth and prosperity of the industry. If all firms adopt this rigorous approach, everyone will prosper through Dublin's ongoing success as a service centre.
It's possible that as the industry matures, administrators may develop in-house solutions that are genuinely best of breed. But excellence in IT systems can be a moving target, so there's no guarantee that in-house development will turn out to be best practice. It may be that the standard of third-party software is so high that in-house developers will never reach it.
Can a financial services company also be a successful software developer? It depends on the circumstances. PFPC's mutual fund business happens to rely on proprietary software, constantly updated and maintained to ensure it does its job. But it's essential to keep an eye on the marketplace to ensure that the technology you use continues to constitute best practice. The clients certainly will.