Institutional Investor's Alpha Magazine - October 2007 - (Page 64)

HedgeFund Administration Curley, head of business development for the Americas at UBS Global Asset Management Fund Services in New York. “This is creating opportunities for startup hedge fund administrators.” For example, a niche player might be an ideal match for a targeted long-short equity startup or a smaller fund looking only for bookkeeping and accounting services, not the full package, says Donahoe. Meanwhile, the larger administrative providers are enhancing their service offerings as hedge funds augment their activities to include more alternative investment vehiBob Donahoe cles, more cross-border investments Citi and multiple master/feeder fund arrangements. As Curley says, “Hedge fund administrators can add value by providing a partnership approach to client servicing.The key to this philosophy is understanding the complexities of the fund and being confident that the client’s expectations can be met before making the commitment to become a service provider.” Adapting to New Strategies Over the past five years, the tremendous growth of alternative sector investments and strategies has posed new challenges for hedge fund service providers.“Administrators will need to continue their investment in technology to support hedge fund growth as well as the growing complexity of hedge fund strategies,” says Buckley. One example of growth is the growing popularity of 130/30 (130 percent long and 30 percent short) strategies. The convergence of private equity and hedge funds is another example of how managers’ new strategies are putting more pressure on service providers. “There is an increasing number of hybrid investment vehicles with a mixture of liquid instruments and private investments,” says Curley.“Hedge fund administrators must provide a flexible technology platform to deal with the unique requirements of these clients.” Dennis Westley Another market trend is the growth PFPC Inc. in master/feeder fund structures, with investors weighting their portfolios differently based on specific strategies.“Partnership accounting and valuation are significant challenges to administrators,” says Dennis Westley, senior vice president and managing director of alternative investment services for PFPC Inc. in Wilmington, Delaware. 2 • Alpha Sponsored Report • October 2007 “Because the performance calculations are complicated, you need proper technology – and more often than not, that means several platforms tied together.” Still another trend in the alternative sector is the use of bank-loan strategies, which pose challenges to service providers in areas such as position reconciliation.“You may have to go back to 200 issuers of that debt, contact them one at a time and settle those positions across the board,” Westley says. “This is another area where an administrator with experience can deliver significant value for clients.” Greater Investor Scrutiny Institutional investors are scrutinizing hedge funds more closely and demanding more transparency at all levels. In many cases, that means investors are playing a greater role in reviewing service provider relationships, including visiting service locations for due diligence reasons and asking for higher levels of reporting transparency. As a result, hedge fund administrators are focused on improving their own internal controls to meet Alpha requirements, according to Curley. A good example of this is growing demand for businessunit-level SAS 70 assessments (Statement on Auditing Standards No. 70, Service Organizations). “Many institutional investors are asking hedge fund managers if their custody and administration providers have a SAS 70 review completed by a reputable firm,” Curley notes. In keeping with this trend, instiJohn Buckley tutional investors are also asking Citadel Solutions hedge fund managers whether their administrator possesses the expertise to value all securities within their fund. “Booking and valuation of complex instruments continues to be an issue facing hedge fund administrators,” says Curley. “Hedge fund administrators must develop inhouse expertise to handle exotic instruments and illiquid instruments.” On the other hand, most over-the-counter instruments are becoming more mainstream, making them easier to value. Providing an independent valuation of complex securities within a client’s portfolio can be accomplished through spending time with the fund manager and truly understanding the instruments, specifically valuation methodologies and sources of third-party pricing, says Curley. In addition, administrators need to ensure they are hiring qualified staff with the skill set to handle more complex funds. Responding to investor demands for more information, fund managers are asking their service providers for more

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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