Fund Administration Q & A

Fund Administration Question & Answer

A couple months ago I sat down with Eric Warshal of Fund Associates in Atlanta to talk about the fund administration business and the hedge fund industry. Here is one question I asked him and his response:

Question: What are the top 3 reasons why you see hedge fund managers using independent fund administration firms like yours?

Answer: The top three reasons why hedge fund managers are making use of independent fund administration firms are: 1) Provide investor confidence 2) Convenience/Utility 3) Cost Savings

Providing Investor Confidence: In today’s post Madoff/Stanford environment investors are demanding a new level of objective, independent review of existing and emerging hedge funds so as to be confident that the manager is properly trading and allocating the funds in an appropriate and ethical manner. By having a third party administrator who regularly interfaces with both the Fund’s broker and bank, the investor is able to be confident that their investment is secure. Having a third party administrator also allows the Fund Manager to hold themselves out as a manager who is looking out for the best interests of his investors and operates in an ethical fashion.

Convenience/Utility: A Fund Manager’s primary role is to efficiently and effectively execute the trading strategy of the Fund so as to provide optimal returns. By having to focus on administrative duties, Fund Managers are distracted from their prime role within the hedge fund. Additionally, although many fund managers are skilled traders with years of experience, often times, they do not have the fund accounting experience that is necessary to properly administer the fund. By employing the skills of a third party administration services firm, the Fund Manager is able to focus on what they excel at, i.e. trading, and allow the admin firm to accommodate for the administrative aspect of the fund.

Cost Savings: By outsourcing the fund administration to a third party, the Fund Manager is able to decrease his costs by not having to invest in an accounting technology platform and not having to invest in fund accountants. Additionally, the Fund Manager is able to save the costs associated with his time that would be better spent addressing the strategy and trading of the fund.

Eric Warshal will be answering more of my questions on fund administration in the future.

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