Q. What is Hedge Fund Administrator? And is that an important role?
A. Its an extremely important role, and definitely one of the things to look at when you’re considering investing in a hedge fund. The administrator provides the nuts and bolts of the fund, from handling the subscription documents to accounting for the contributions, redemptions, profits and loss, doing all the reporting to investors, even calculating the manager’s incentive fees.
Q. So, really critical stuff. This function is usually outsourced by smaller and midsized managers?
A. Right. So when you’re looking at small and medium sized funds in particular– which you do, because of their often better returns– looking at the quality of the service provider team is one of the best shorthand ways to know that you’re looking at a quality manager. And the administrator is really a key element, right there with the lawyers and auditors.
Q. And its mostly the name brands that give you protection? Are their more specific things to look for or ask for?
A. Well, you do see some fund administrators offer a “second signer” service, under which the hedge fund manager cannot withdraw investment funds without the administrator’s OK. Certainly that’s a nice additional layer of comfort to have when you’re dealing with smaller or newer managers.
Q. Why else might you like to see an outside administrator?
A. One of the other top reasons is calculation of the incentive fees, especially when it comes to things like the high water mark. Those calculations can be a bit tricky anyway, and its nice to have an independent third party making those determinations and sending the checks around to the investor and the management company.
Q. But even knowing that there are quality service providers around doesn’t negate the need for real due diligence on the manager, right.
A. Right. There are, by the way, several due diligence firms out there that will do that job for quite a reasonable price. But you can tell an awful lot by looking at the professional services team around a fund. That doesn’t mean the manager won’t lose money… but it probably means he’ll lose it the right way.