Over the past decade Dublin has made itself one of the three major global centres for hedge fund administration, alongside the Cayman Islands and the United States.
Over the past decade Dublin has made itself one of the three major global centres for hedge fund administration, alongside the Cayman Islands and the United States. In particular, it has become the centre of choice in Europe for administration of offshore funds, most of which are in fact domiciled in Cayman, and although other jurisdictions have emerged as potential competitors for either the domiciling or servicing of offshore hedge funds, there is no sign that the tried and tested Cayman-Dublin model is under serious threat. Over the past few years Dublin has had to face up to various challenges.
A decade ago it enjoyed a significant advantage in terms of costs, but Ireland’s very success in becoming a leading financial services jurisdiction has contributed to an increase in the level of salary costs and other overheads, as well as making it harder for fund services companies to recruit and retain skilled staff.
Nevertheless, a tight labour market and high cost base are characteristics that Dublin shares with competitor jurisdictions, and it continues to attract leading global fund services groups through acquisition or the establishment of start-up operations. The fact that Dublin is now home to most of the world’s leading hedge fund administrators testifies to the market’s confidence in and commitment to the jurisdiction for the long term.
The growth of Dublin – and Ireland as a whole – as a hedge fund servicing centre, and the pool of administration experience and skills it has built up, have placed fund administrators in an advantageous position amid a significant change in the nature of the hedge fund industry. As managers develop new strategies, trade highly complex instruments and create hybrid product that move into other alternative investment areas such as private equity, administrators need to have the right skill sets and staff to value these complex instruments and service innovative products.
This is especially important because administrators are more than ever required to demonstrate their independence from the investment manager and must find the means to value instruments barely understood outside the rarefied world of the investment banking specialists who created them. They must have the capability and access to specialist skill sets to provide an accurate valuation on these instruments rather than simply accepting the investment manager’s prices.
The administrator may have a contractual relationship with the investment manager but increasingly it has wider responsibilities toward and interaction with the fund’s investors, a change that reflects both an increasing level of regulation of hedge funds and a change in their typical investor base. In the past they tended to be mostly high net worth investors and family offices, but now a growing proportion of investment comes from pension funds and insurance companies. Before they invest in a fund, institutional investors will require assurances that the administrator is from the top drawer of service providers, that they offer a good control environment, and that they can be relied upon to provide timely and accurate information.
Institutional investors are sophisticated and used to a strong control environment, and have their own reporting requirements and in-house compliance and risk controls. As the hedge fund ndustry expands and develops, this trend can only grow.
Sean Flynn- managing director and head of Hedge Fund Services at UBS