Industry calls for improved hedge fund admin

Standardising the way exotic investments are valued and improving the administration of absolute return funds will be hot topics at this yearÆs Sibos.
The shift from investing in traditional assets to those that offer more alpha is a worldwide phenomenon. Alternative assets like hedge funds, over-the-counter derivatives and structured products are now enjoying unprecedented popularity with pension funds and other mainstream institutional investors. In many cases, the speed at which these assets have been embraced has had the back office running to catch up.

Now investment managers say that it is time for mainstream fund administrators to step up to the plate. The number of firms that offer back office administration and NAV calculations for hedge funds and exotic instruments is limited to a handful of players. Those with a presence in Asia include Citco, Fortis and HSBC, which entered the business via its acquisition of Bank of Bermuda.

According to some, there isnÆt enough competition in the field. ôWe have heard from sources like the Monetary Authority of Singapore that there arenÆt enough fund administrators in the alternatives space to spread the risk,ö says one hedge fund manager. ôThey and other pension funds would like to see more choice available.ö

Mainstream administrators are being encouraged to take up the challenge. ôCompanies like Citco have been opportunistic and taken advantage of the fact that the big custodians were focused on the traditional end of the market. Citco realised there was a gap in the provision of administration, valuations, compliance monitoring and performance measurement for alternative assets and funds,ö says the fund manager.

The mainstream administrators in a position to take up the challenge include JPMorgan, State Street, Bank of New York and Citigroup. JPMorgan claims it is already operating in this space in Europe and the US, offering third party administration and middle office outsourcing services to hedge funds. ôWe have a number of clients using this service in the developed markets and now weÆre planning to set up in Asia,ö says Bhagesh Malde, global head of hedge fund services for JPMorgan.

He says the new focus makes a good fit for JPMorgan because of the bankÆs own activities in originating and selling derivatives. ôEssentially we have taken some people who do product origination for the investment bank and moved them over into our administration team. Their expertise in being able to place a value on exotic instruments has been invaluable,ö says Malde.

Still, the complexities of administering hedge funds and alternative assets remain. Even the most basic administration task of placing a value on a fund or an instrument is difficult when the assets are not exchange traded. ôPeople get nervous about alternatives partly because they donÆt know how independently they are being valued,ö says Laurence Bailey, who heads worldwide securities services for JPMorgan in Asia. ôThere are many different ways to reach a valuation of a hedge fund, or a private equity fund, or leveraged loans or over-the-counter derivatives. What we need is more standardisation in the industry. Ideally there needs to be a consistent and agreed methodology for valuing these alternative investments.ö

Such a situation may be a long time coming. No doubt delegates to this yearÆs Sibos conference will be discussing ways to overcome the deficiencies in present day alternatives administration.
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