Fundamentals of Fund Administration

Many funds have decided to focus their role as investment managers and have decided to outsource their work, especially those operational work. In particular hedge funds, their roles like custody and administration tend to be handled by specialist organisations, prime brokers and fund administrators. These roles are important as in reducing almost completely the need for the "fund manager", in this sense the sponsor/owner, to be involved in anything but investment decision-making; and the setting up of new hedge funds is made staggering easy. This may go some way in explaining the significant growth in these funds in recent years.

However, fund administration has evolved from a relatively humble beginning where the primary role was that of calculating the value of the assets in the fund so that a price for the investors wanting to buy or sell shares or units in the fund could be established. Today a fund administrator may have roles related to everything from setting up the fund to risk management and compliance roles. The administrator is very much monitoring the fund to ensure that the actions of the investment manager are in line with the objectives of the fund, the regulatory environment applicable to the fund, the tax situation affecting the fund and the client service role between the fund and its investors.

As a result some of the functions previously carried out by specialist firms have been absorbed into the fund administration role, particularly within the largest fund administrators. Transfer agency/fund registrar services for instance are provided as part of fund administration services by some companies. However specialists can and do survive, providing bespoke services to their clients.

In some ways the fund administration business has evolved in similar way to custody services. Consolidation, expanding range of services, competition, increased costs and investment have all impacted on the business.

This expansion of funds and the role of the fund administrator is not without its problems. Some financial centres like Dublin have witnessed huge growth within a short time frame. This can obviously lead to strains on the infrastructure and the community not only in small offshore locations but also in larger locals like Dublin and Luxembourg . Shortage of experienced personnel is an inevitable consequence of the development of fund administration services in a developing financial centre. This is made more critical by the need for skill sets in more and more diverse products and strategies, particularly in the hedge fund arena. Another factor is that the large organisations can move their entire operations function dealing with the administration of funds and other operations-based functions to these localities putting even greater pressure on the recruitment environment.

We can add increased workflow to the list of evolution of the fund administrator's role. Many of the funds that appoint external administrators have been small funds like private funds, hedge funds, etc and many of them were closed funds. These funds by nature had, relative to retail mutual funds, far fewer requirements in terms of reporting, etc. As a result many would calculate the NAV of the fund perhaps monthly, some even less frequently. Today many of the hedge funds are seeking to be included in funds of hedge funds and these in turn are attractive vehicle of other funds to invest in. As a result the NAV needs to be calculated daily if the wide appeal is to be maintained. Given the types of products these funds might be investing in, the relatively straight-foward NAV calculation by the administrator becomes, when needed on a daily basis, somewhat of a nightmare.

If we also consider the greater sophistication in the use of products and strategies and therefore the need for product and market knowledge then the whole administration process, not just valuations, becomes a much more demanding function.

Reporting to investors and the manager, fund set-up, monitoring compliance and managing risk have all become more and more high profile issues and the fund administrator has had to respond by developing and providing the kind of support and services that the managers require.

One thing is for sure, the changes will continue; and so, as long as wealth continues to be created, will the growth in the number of funds. Each one will need an administrator!