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Hedge Fund Administrators Cash In On Calls for More Oversight

Hedge fund administrators have seen their business come roaring back as hedge fund investors insist on third-party oversight. Once an invisible aide, the administrator is now a front-and-center participant in the investment process.

Cory Thackeray has been taking advantage of hedge fund investors’ growing demands for greater transparency and oversight. “Investors and consultants are really driving much of the change,” says the New York–based global head of fund services administration at Goldman Sachs Bank USA. Thackeray should know. He’s held his post since 1996, when administration was a back-office function and there was less than $260 billion in the entire hedge fund industry, according to Chicago-based Hedge Fund Research. Today global hedge fund assets stand at $1.8 trillion, close to the peak of almost $2 trillion they hit in mid-2008 before plummeting to $1.3 trillion early the next year.

That dramatic upheaval has left investors badly bruised. Shaken by average losses of 18 percent during the first few months of 2009, lack of access to gated funds and the shock of the Bernard Madoff scandal, they expect more from their managers — and from their fund administrators.

Investor requests for sharper net asset valuations, independent account reconciliation and more clarity on multiple risks — including counterparty and liquidity — are commonplace. Meanwhile, with expected regulatory change comes increased reporting complexity.

No one gets this new reality better than the folks at the center of the data hub. Once an invisible aide, the administrator is now a front-and-center participant in the investment process. “There’s a lot more collaboration on product enhancements that’s driving the industry along,” Thackeray explains. “This includes communication among investors, consultants and investment managers, and even a healthy dialogue between fund administration competitors.” Like his peers, Thackeray has seen business come roaring back — his unit has $202 billion in assets under administration — as hedge fund investors insist on third-party oversight.

At Chicago-based Northern Trust Corp.’s alternative asset servicing unit in Ireland, senior product manager Ian Headon notes the uptick in U.S. hedge funds’ hiring outside administrators. While the bulk of European hedge funds have always used independent administration services, the practice is only now becoming the norm in the U.S.

Headon estimates that the number of U.S. hedge funds that outsource their back offices has risen from 50 percent in 2007 to 75 percent today. More business and a wider variety of reports for vehicles such as separately managed accounts have put administrators on the hedge fund schedule, not the old pension or custody timetable. “This is a daily world; it’s not a monthly world anymore,” Headon says.

The need for better reports, combined with stronger technology, has led administrators to improve their number-crunching. Re- sponding to investors’ fears that they got different levels of information for varying liquidity needs, Morgan Stanley Fund Services developed what New York–based CEO Seth Weinstein calls the first branded fund reporting product. Dubbed Stratum, it allows hedge fund managers to reveal as much data as each investor requires. “We’ve become the recipient of many more investor due-diligence requests, in addition to those directed toward the managers themselves,” notes Weinstein.

Investors also use administrators to reach out and touch hedge funds. “We see investors frequently on our premises,” says Citigroup hedge fund services boss Michael Sleightholme, who finds himself pulling out NAVs or reconciliation packages for them at his New York office. “The depth to which people are delving is much deeper.”

Administrators are digging deeper too, into new asset classes, services and manager structures. Goldman Sachs has moved fund services from the securities and prime brokerage unit to the bank, where they are under the regular scrutiny of regulators. Robert Donahoe, former head of sales at Citi’s fund services group, was hired to bring in hedge funds that don’t use Goldman’s prime brokerage services. Thackeray is gearing up to expand into private equity and fund-of-hedge-funds administration, following rivals like Citi.

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