Understanding the Dynamics of Hedge Fund Administration

Hedge fund administration has been playing a major role in driving profitable growth in finance for the past years. But as new competitive forces shape the asset management industry, administrators face the tougher responsibility to master and apply different trends that would suit the firm’s structure, size, ownership, and service mix. According to a study conducted by PwC “Hedge Fund Administration: The Quest For Profitable Growth,” these trends include higher demand for regulatory reporting, cost-efficient fee operations, and manager and product convergence. Research further explained that expanded outsourcing is also one of the most common techniques that could fuel organic growth opportunity for hedge fund firms. In fact, asset management experts Debasis Sahu and Erich Butters mentioned that if private equity outsourcing were to reach 50% (from the current 30%) in three years, then “the incremental revenue opportunity for the fund administration industry would range from $660 to $880 million on a undiscounted basis for the period of 2014-2018.” Although the aforementioned trends are equally important, administrators need to choose very wisely where they will focus, in order to achieve optimal results. For example, to efficiently increase profit margins, small, undercapitalized administrators may have to concentrate on improving both cost efficiency and their core competencies. On the other hand, well-capitalized administrators have to constantly formulate and execute a strategy that focuses on creating and sustaining a competitive advantage. Coming up with advanced investment strategies such as short, long, leveraged and derivative positions in both domestic and international markets with the primary aim of generating higher returns, is just half of what hedge fund administration is all about. It also covers the management of fund in virtually all aspects of the day-today operations, including the daily, weekly, monthly or quarterly calculation of the NAV and the NAV per share or unit. Handling all payment processes concerning redemptions, subscriptions, feeds and expenses is also part of the task, along with the preparation of the annual audit file. But the challenge does not stop there. Every single report and action plan must adhere with such regulatory requirements as Anti-Money Laundering, Patriot Act, FINRA, and AIFMD and FATCA compliance. Since manpower is not enough to guarantee accuracy of reports and 100% visibility across all portfolios, proprietary cloud-based technology is still a fundamental tool for hedge fund administrators. While these data summarize hedge fund administration, such task remains grounded on personal communications. At the end of the day, the administrator will be the bridge between the firm, the manager and investors.