TABB Group: Hedge Fund Administrators Second Only To Prime Brokers

by Leroy Baker, Tax-News.com, New York

13 November 2009

With a post-Madoff world fixed firmly in the rear-view mirror and new regulations on the horizon, a new report from TABB Group describes the importance of the role of fund administrators.

What investors want today, says TABB in a new research report, is more transparency and greater asset safety, which requires improvements in infrastructure for middle- and back-office operations, enhanced reporting to stakeholders, and independent verification of portfolio values.

According to Paul Rowady, senior analyst, and Adam Sussman, director of research, who co-authored the report, “(Hedge) Fund Administration: The Selection Criteria for a New Market Reality,” administration is no longer centered simply on back-office functions dealing with accounting, valuation and share registration. “Fund administration can now be defined as everything after the trade.”

Facing high switching costs, fund managers tell TABB they are keenly aware of how important it is to make the correct administration selection. With managers in Europe as well as the US becoming more sensitive to investor’s increasing demands, TABB Group estimates that from 2009 to 2010 the frequency of daily NAV (net asset value) calculations will increase to 56% of hedge funds, up from 46% in 2009.

Prior to 2008, fund-administrator selection revolved around fund administrators’ brands and fees. “Size and brand do not ensure that an administrator deploys the most reliable technology, SAS Level II certified processes, domain expertise and scalability, not only in terms of size but the fund's ability to adapt its operation to changing technology, regulations and market conditions,” says Rowady.

TABB details three administrator models in the report: custodian-owned, broker-owned, and independent/hybrid independent. Although the independent model strives to minimize conflicts of interest that could influence the administrator’s asset valuation and verification practices, the “hybrid independent model enjoys arm’s-length operating independence combined with the financial backing of a larger entity and this may represent the best model,” says Rowady.

The authors believe the industry is seeing an end to the era in which funds manage their processing internally with a “trust me” nod to their investors. “We see more investors pushing hedge funds to migrate their processing and valuation responsibilities to qualified third parties, firms that will need to expand their processing capabilities to be more on demand, more responsive and more global.”

Selecting an administrator is a complex and resource-intensive process, says Sussman. “The good news is, there are clues that investors and managers can use to make well-informed selections based on their needs and the ability of an administrator, regardless of size, to meet those needs.”

The 21-page report with six exhibits covers the changing market landscape for both alternative and traditional fund managers and how this new market reality serves as a driver for the broadening spectrum of administrator service offerings, enhances the importance of fund administrators and the outlook for the fund administration business, and details how fund administrators are now instrumental to the long-term success of funds.

The report describes the strengths and weaknesses of the three primary business models of fund administrators, including a discussion of the optimal model. The report also covers the fund administration landscape, pinpointing as many as 70 administrators globally, and details a comprehensive list of selection criteria with focus on the two factors that have replaced brand and size as the most important selection drivers.

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