"Hedge funds are very complex instruments...they're very sophisticated products to administer," said Investors Bank & Trust's Chris Coleman, who moderated a panel discussion on hedge fund administrator oversight at The Asset Managers Forum Operational Risk Management Workshop held on Tuesday in New York City.
Currently, the processes surrounding the accounting, custody, administration, shareholder/partner servicing and middle-office servicing are predominantly outsourced functions. As hedge funds stay on track to hit the $1.5 trillion mark in 2006, more investment managers will face the task of having to choose and oversee third-party hedge fund administrators. Additionally, as the looming February 2006 hedge fund rule puts more pressure on firms in terms of transparency and accountability, selecting the right vendor for the job will prove even more crucial.
Recounting his firm's evaluation of hedge fund administrators just last year, panelist Paul Fehre, director, New York Life Investment Management, said he was surprised to discover that a number of investment managers approached potential hedge fund administrators without a request for proposal (RFP). He advised his peers to make an RFP, do due diligence and create a service-level agreement upon final selection. "[Creating a service-level agreement] is something we did not do, we've since done, but it's definitely important to do that up front," he said.
Panelist Steve Haley, chief operating officer, Citigroup Alternative Investments, added that investment managers also should look at staff turnover when choosing an administrator. "Some firms have had a lot more staff turnover than others," he said. "Staffing is your lifeline. You're only as good as the staff at the administrator you have." (Citigroup Alternative Investments has eight different hedge fund products and families in their organization, all of which are outsourced. It also uses administrators across all of those products.)
Technology capabilities were a top concern for all the panelists. Hedge fund administrators' must-haves included automated links to prime brokers, automated reconciliation processes, and automated controls. "We spend a lot of time looking at the controls of a particular administrator," explained Haley. "We'd like to see controls that are built into the system, especially when they're passing data off from point A to point B."