Fund Administration Q & A

What Size of Hedge Fund Needs a Fund Administration Firm?

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: How large must a fund be before they should use a fund administration firm? Is there a size where a fund can be too large or too small to use a fund administration service?

Answer: When to engage the use of a fund administration firm is primarily driven by a couple of factors. When a fund first starts up, for many funds their AUM is quite small and the prospect of outsourcing fund administration is a bit taxing if for no other reason than the costs of doing so and how that may affect their monthly performance.

However, by not engaging with a third party, independent administrator early on, the manager is not only increasing the effort that will need to be put forward when they do decide to use an outside administrator, but is also likely limiting his prospects of soliciting new investors. For in this current environment, most investors are looking to ensure that an objective third party is reviewing and calculating the returns of fund on a monthly basis, so as to give them the level of confidence they need to make the investment.

On the opposite range of the spectrum, the need for investor confidence rings true for investing in large funds as well. Institutional investors often times require third party administrators for funds they invest in. Additionally, larger funds are able to take advantage of the experience of the fund accountants and the cost efficiently associated with economies of scale that third party administration firms enjoy and thereby don’t have to invest in the personnel and technology platforms that could otherwise increase their cost structures.

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

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