Friday, 24 February 2017
Last updated 16 hours ago
Oct 21 2009 | 1:00am ET
By Dani Holt-Lyman -- After a period marked by unprecedented declines in alternative assets under management, institutional and private investors are now scrutinizing funds' operational support infrastructures more closely than ever as they begin to return to the sector.
Consequently, many fund managers are seeking out platforms that can provide institutional strength support to enhance their operational model. In doing so, many are deciding that fund administrators who can provide such a platform, such as LaCrosse, can also reduce costs and shift operations to a variable cost structure.
Investors are increasingly concerned with pricing transparency and independence. Distinct separation between individuals responsible for valuation and the investment process has become a requirement for institutional investors. Valuation by independent administrators guarantees that investment making and pricing responsibilities are segregated. Even when pricing services are used, administrators can ensure that trades sent to independent valuation service providers are an accurate reflection of the fund’s positions, a further comfort to investors.
Spreading The Risk
One service offered by operating platforms like LaCrosse in particular is receiving attention: cash and collateral management. Fund managers are choosing to diminish counterparty risk by distributing positions and cash balances among several prime brokers. OTC derivative intermediary agreements are now much more difficult and expensive to obtain. Some platforms like LaCrosse can actively manage collateral balances and minimize excess collateral with OTC counterparties and prime brokers. This serves a dual benefit of reducing counterparty risk and ensuring investor capital is used for its chief purpose of financing additional transactions.
Daily reconciliations performed by administrators can also relax the resource burden of additional prime brokerage or counterparty relationships. Reconciliations ensure that a fund’s trading information matches what is claimed by the market, that the books and records are correct, that P&L is not overstated or understated, and that settlement risk is reduced where possible.
A quality operating platform can aggregate reconciled prime broker and counterparty reports into a single view. A fund manager only needs to look at one set of reports to review all traded positions, unconfirmed trades and daily collateral calls. The platform can play a multi-faceted role, acting as a single data storage centre and reducing operational risk.
Changing Fund Structures
An uptick in demand for managed accounts and UCITs funds has been amplified by increased investor awareness. These structures are perceived by the investment community to command greater transparency than traditional hedge fund structures. Managed account structures often have unique operational requirements that a fund may not be resourced appropriately to accommodate. The specific requirements of a managed account structure should be captured during the boarding process and incorporated into any service level agreement. The day-to-day ongoing client servicing should be doubly focused around the needs of the investor and the investment manager.
Investor consciousness is affecting the structure of the hedge fund industry as well as the support infrastructure. Independent administrators with strong global services Like LaCrosse have the ability to help mid-sized fund managers achieve economies of scale for a large range of asset classes, while also supplying high levels of operational expertise in specialist areas. These kinds of services can help a fund manager to cut costs and develop a robust infrastructure capable of evolving with dynamic industry changes, all while standing up to the most rigorous investor's due diligence.
Dani Holt-Lyman is a senior client services representative at Lacrosse Global Fund Services. In this role, she is involved with on-boarding new clients and managing Lacrosse’s service offering. She graduated from Swarthmore College in 2004 with a B.A. in Economics and is an associate member of the Securities & Investment Institute.