A growing need for customisation
As the hedge fund industry continues to grow and mature, managers are considering options beyond the traditional hedge fund structure. To this end, the managers and their service providers must be flexible and nimble to create custom solutions for the benefit of all parties involved.
“We’re seeing many different fund vehicles come to market and as a service provider, you need to be able to adjust your service offering and your approach to match those changes,” comments Leanne Golding (pictured), Director of HTC Fiduciary Services (Harbou”) in the Cayman Islands.
Expanding into new areas can be challenging. One of the areas where Harbour has seen growth is in requests to add independent oversight on structures which are not a traditional corporate entity. Golding explains: “Traditionally, the offshore hedge fund structured as a limited company would have an independent board, but today we see a wider variety of legal structures being used – including limited partnerships and limited liability companies in both Cayman and Delaware. As institutional investors invest in these structures, they want to see the level of independent oversight they are used to, regardless of what legal form it takes.”
Harbour is ready to meet this challenge. “Being able to go beyond the standard board structure and using the skills we’ve gathered through our governance experience to expand into advisory board structures for limited partnerships have proven to be a valuable service to our clients,” Golding stresses.
Another area which calls to investors’ growing desire for customisation is around co-investments. Although not all managers offer it to all their clients, many are embedding these options in side-letters, offering them to certain strategic investors.
Golding comments: “We’re very supportive of customised offerings. Investors, especially the large institutional allocators don’t want cookie-cutter investments. We see them asking for customised opportunities. For example, certain strategic investors may like the flagship strategy of a manager but want to adjust the leverage slightly or maybe need to carve out certain aspects to meet their internal ESG requirements.”
“From our perspective, we find most managers are happy to accommodate these requests. However, when such an option is included in a side letter, we need to make sure the terms the manager is agreeing to are achievable –in terms of reporting and various other regulatory aspects. Investors sometimes have very specific requirements and the manager needs to be nimble to attract that capital. So, we need to review the agreements, evaluate them and offer our insight on what may work and what will not.”
In her view, co-investments are bound to increase as managers find opportunities amid growing volatility: “It is going to become more of the norm to have those offerings available to a larger portion of a manager’s investor base. Some managers definitely benefited from the dislocation and disruption we’ve seen this year. It depends on the market but there are a lot of opportunities out there as well as large amounts of capital waiting in the wings to be deployed within those kinds of strategic investments.”
Increased regulatory requirements
In its role as a service provider, Harbour is supporting clients to manage their ever-growing regulatory requirements, such as additional CRS reporting and the need for AML officers.
Since 2018, all funds conducting business in the Cayman Islands are required to appoint an Anti-Money Laundering Compliance Officer, a Money Laundering Reporting Officer and a Deputy Money Laundering Reporting Officer.
Golding says: “When we saw the requirement come in, we understood the rationale behind it. Since then, I’ve seen the value those AML officers provide and the oversight they undertake of the AML programme for each of those funds. Having a service provider who can provide suitably qualified officers and that have a good relationship with other providers who can do that for you is of valuable support to fund managers.”
When it comes to the additional CRS reporting requirement that was recently introduced, Golding notes it’s a considerably lengthy filing which can be onerous for a manager to undertake directly: “This needs to be filed by 31 March 2021. It’s definitely something all our clients need to be on top of. As directors we’re making inquiries to ensure our clients are aware of these requirements and to see whether they need any assistance in that regard.”
Expanding board support
Another area where the firm has seen expanding value is in providing board support. Golding details: “There is a definite trend towards having what we commonly refer to as a split board. Here you have independent directors from various different firms coming together to provide a diverse board for a particular investment fund. With a split board, we found it’s very beneficial to have a designated party acting as the company secretary and providing formal board support to all of the directors. When you have individuals split across time zones, offices and locations, the governance programme benefits from having someone coordinating the board materials and taking minutes that provide a valuable and accurate summary of the meeting.”
She explains that with large institutional sized managers this role is sometimes taken on by the legal department, but emerging managers may not have the extra internal resources to fulfil these tasks. This is why outsourcing to firms like Harbour has become more commonplace. Golding advises: “Beyond the immediate tasks, it is also really important to have a designated person to follow up on action points in between meetings. This way anything that has to be resolved before the next board meeting can be settled.”
In terms of broader industry development, Golding outlines: “There are many more moving pieces when it comes to finding the right mix of service providers to have an efficient running of your business. This mix will enable a manager to take advantage of the opportunities available.
“People are now very comfortable with most forms of outsourcing. Finding the right outsourced service providers to help carry some of the administrative load allows the manager to focus on what they do best.”
Director, The Harbour Trust Co Ltd
Leanne Golding is a Director of HTC Fiduciary Services Limited and an officer of The Harbour Trust Co Ltd (together, doing business as “Harbour”), and is responsible for providing fiduciary services to Harbour’s fund clients, including serving as an independent director for such funds. Leanne previously worked for Goldman Sachs Administration Services (GSAS), where she was Vice President, Global Investor Services managing the Investor Services team in three jurisdictions. She joined the Harbour team in 2009.