This is the 3rd part in my series of articles about Fund of Funds. Please read the two articles below for more background.
Hedge Fund Administrator and Service Providers
There are four main structural components to a fund of funds. You need an administrator, auditor, legal counsel, and in some cases, a prime broker. Marketing, offices, and staff are all up to the discretion of fund management.
Hedge fund of funds have increasingly been turning to fund administrators as independent third party verification of returns. There has been a definite increase in the need for fund of funds to provide independent verification of their assets.
Joe Goldstein, Co-Founder and CFO of GS Fund Services stated, “As an administrator of Fund of Funds, we agree that it is an excellent way to employee strategies of successful managers in manner that can provide less volatility and more diversification . The challenge in administering fund of funds, is getting the monthly NAV’s from the underlying funds in a timely manner, therefore we always hope that all the underlying funds use administrators and set reasonable delivery date for the monthly results.”
Proper due diligence involves contacting the underlying service providers of the fund of funds. Benefits to potential third parties are an independent verification and valuation of assets. And benefits to the fund are the outsourcing of essential duties not relating to selecting managers and increase of investor confidence.
Proponents against hedge fund of fund administration may argue against the expense of administration or argue for in-house administration. However, this is a baseless argument as fees are much lower due to economies of scale. A large administration company’s fee is generally less cumbersome and expensive than hiring in house. Also, in a post-Madoff world, it is not wise to even look at ANY fund that does not have an independent administrator.
Fund of Hedge Funds need to be analyzed on an individual basis. There are many added benefits and problems that may be associated with each type of product, and each individual fund of funds. As an investor or researcher, you need to determine what your individual needs and risk tolerances. It may be a good idea to contact an industry professional or database, to assist in research regarding this topic.
Related Hedge Fund of Funds Links:
Related Hedge Fund of Fund education links:
This article was written by:
Ryan Conner, CAIA
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