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.
After they start a hedge 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. Hedge 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
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