By Rick Gorter - Earlier this year, a shadow seemed to hang over the fund administration sector in the Cayman Islands, amid reports of staff cuts and movement of operations to lower-cost jurisdictions. While some of this may have taken place, the overall view of the sector is that of steady growth.
As the world moves further away from the financial downturn, the alternative asset investment sector is looking at the future from a positive viewpoint. From a fund administration perspective, business can only get bigger. After the Madoff scandal, most hedge funds have parked their administrative responsibilities in the hands of a third-party specialist. Investors now want independent administration at all costs, insisting a second set of eyes is overseeing the asset manager’s activities.
The logic is compelling that a hedge fund cannot umpire its own game, but it has taken some time for this to become the administration paradigm. The US has only recently caught up with European funds, which have employed third-party administrators for quite some time.
The related truism is that the main responsibility of fund managers is the marketing of their fund and the management of investor assets. Their intellectual capital is best exploited in these activities, rather than in the time-consuming administration of the fund. .
Independent administrators help fund managers in a variety of ways. For example, they provide an extra level of security against fraud as a third party responsible for confirming that the hedge fund has the assets it says it does and that the valuation process has been properly applied.
Investors also customarily want the reporting function relating to a fund to be independent of the fund sponsor, which is achieved by using a reliable and experienced third party that will report on the fund’s performance.
With increased regulation and the burden of compliance, administrators are well placed to shoulder much of this burden, as they are more in tune with the regulatory and corporate requirements of the jurisdiction of domicile. Indeed, compliance has become a growth business for fund administrators.
Hedge fund managers are increasingly turning to independent third parties for middle- and back-office functions including portfolio accounting and reconciliation, pricing and valuation, custody of both collateral and non-collateral assets, cash management, NAV calculation and counterparty risk mitigation.
Independent administrators offer sophisticated IT platforms and related internal controls and procedures that provide for the proper accounting, valuation and reporting of fund positions. They are also themselves subject to internal and external audit and regulatory scrutiny to ensure the integrity of their operations.
Proper administration is a long-term litmus test for investor confidence. It is also in the interest of the fund sponsor, whose own returns from the fund can be affected by the quality of administration. Investor sophistication and growing compliance and regulatory requirements demand new levels of transparency – and an independent administrator can make sure that these levels are achieved.
From a Cayman perspective, the industry has come a long way. The islands have stood the test of time to become one of the most flexible, efficient and experienced hedge fund domicile and servicing jurisdictions. And when the AIFM Directive and new SEC regulations come into force, the islands are likely to see continued growth in demand for the spectrum of services independent administrators can offer.
Rick Gorter is managing director of Trident Trust Fund Services Cayman
Please click here  to download a copy of the Hedgeweek special report Cayman Islands Hedge Fund Services 2011