Fund admins need to be more selective when onboarding hedge funds, says Towers Watson
Hedge fund administrators need to be more selective when they onboard managers, a senior executive at Towers Watson has said, speaking at a hedge fund ops conference in London. “Hedge fund administrators, particularly smaller scale businesses, are struggling and this has resulted in some being less diligent about the type of managers they take on. These fund administrators need to do better due diligence on these hedge funds as it could present them with liability issues further down the line,” said Justine Lee, senior investment consultant and head of operational due diligence at Towers Watson. The fund administration space has struggled of late as clients are unable to generate decent performances while regulation is starting to bite. This has been evidenced by the raft of mergers and consolidations in the sector, particularly among smaller-scale businesses. Despite this pressure, Lee said administrators should turn away business from managers, which do not satisfy basic due diligence requirements or present a fraud risk. “Business is tough, but if a fund administrator takes on a less than scrupulous fund, then the administrator is potentially liable,” she said. “This is an issue which predominantly affects the administrators at the lower end of the scale. The larger administrators tend to have better internal procedures when it comes to onboarding funds,” added Lee. Fund administrators are potentially liable for any inaccuracies or failures to spot frauds. In 2007, GlobeOp was forced to put its IPO on hold following a $465 million lawsuit from disgruntled client Archeus Capital Management, although it later settled. While many administrators take out insurance minimising the cost-risks of litigation, such insurance is not fail-safe and an investor lawsuit could theoretically put an administrator out of business.