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Having a hedge fund
administrator for your fund is extremely important in today’s
constantly changing hedge fund environment. A hedge
fund administrator does not manage your portfolios, trade or research,
develop products, raise capital, or manage client relationships. These
functions are the core functions of your business that tend to be out-sourced
infrequently. A hedge
fund administrator services your clients and investors; supports you
administratively and operationally; and provides you financial, tax and
compliance reporting. This includes audits and tax coordination; compliance
services such as anti-money laundering and know-your-client procedures
required by the Patriot Act, and middle office services. These functions
are critical to the successful daily operation of your fund and investment
adviser.
When administrating their own fund, many fund managers find they are
in over their head. In-sourcing requires you to hire sufficient support
staff with the necessary skills and experience, pay their salaries and
benefits, provide necessary infrastructure (office space, hardware and
software), and supervise their work. In-sourcing also makes you directly
responsible for correct and timely performance of these duties and compliance
with all rules, regulations, and laws, especially the recently enacted
anti-money laundering and know-your-client laws. The other choice would
be to simply outsource these functions and have your fund pay a hedge
fund administrator for all administrative and operational support. Out-sourcing
requires the hedge fund administrator to provide necessary staff, infrastructure
and supervision of the work performed. You can contract with a hedge fund
administrator for correct and timely performance of these duties, and
compliance with all applicable rules, regulations, and laws.
A wide variety of service providers exist for your fund and investment
adviser. Most service providers fall into two broad categories: fund accounting
or fund administration. Fund accounting provides you with financial or
GAAP reporting, some tax reporting for your fund, and occasionally compliance
reporting, typically billed on a time, materials and systems usage basis.
Fund accounting is only a reporting service. You will still be required
to perform most administrative, operational and client servicing functions
for your fund. Fund Administration provides you with client servicing,
administration, and accounting for your fund, typically billed on an asset-based
fee basis subject to monthly minimums. hedge
fund administrators vary widely in the amount and type of client servicing,
administration and accounting they provide. You typically will retain
responsibility for some functions in each of these areas. Fund compliance
with all rules, regulations, and laws, especially the recently enacted
anti-money laundering and know-your-client laws, can become an onerous
burden. You can determine the amount of compliance you want your hedge
fund administrator to provide for your fund.
A hedge fund administrator greatly reduces expenses and overhead for your fund and your investment
adviser by eliminating the need for a larger administrative and operational
staff. When your fund hires a hedge
fund administrator, your fund pays the “full freight”
or the full cost of their own operations. An outsourcing arrangement with
a hedge fund administrator also enables you to purchase skills, talents and systems that you may
find prohibitively expensive to purchase through your investment adviser.
A hedge fund administrator will bring you access to people trained, and often certified, in accounting,
finance and operations. A hedge
fund administrator will also provide access to accounting, operational
and client servicing systems that may be beyond the means of your investment
advisory.
Your investors will appreciate the independent third-party verification
of your funds’ operating results provided by a hedge fund administrator.
A hedge fund administrator can also provide you custodial services to
safeguard the investor monies and the assets of your fund. Professional
accounting and finance individuals with investment industry experience
will service your investors. These individuals bring a wealth of administrative
and operational experience to the table. Hiring a hedge fund administrator
increases the size of your operations by providing a virtual administrative
and operations staff. Your investors will pay approximately one basis
point (0.01%) of return per month for the benefits of these services,
a cost, which will barely reduces the returns of your fund, but will greatly
enhance the service.
So to sum up, a hedge
fund administrator will:
- Perform your critical, non-core administrative and operational
functions,
- Reduce the operating cost of your fund and investment
adviser,
- Relieve you of necessary and time consuming operational
duties,
- Provide independent third-party verification and reassurance
of your fund results to your investors,
- Provide access to accounting, finance and operations
professionals and systems you may not be able to afford. In short, a
hedge
fund administrator provides support services to your investors and
your business.
Todd A. Krause
Managing Member of
Trident Financial Services, LLC
Chicago, Illinois
Related Reading:
 Hedge
Fund Definition
Origin
of Hedge Funds
Domestic
Hedge Funds or Offshore Hedge Funds
Hedge
Fund Managers
Why
Hire a Hedge Fund Administrator?
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