Shadow fund administration debate-post Bridgewater is "passing phase"

Fund Administration
06 Mar, 2013

Institutional investors are discussing shadow fund administration more with their hedge funds in light of the Bridgewater Associates-BNY Mellon-Northern Trust deal, although it is likely to be a passing phase, the co-CEO at Wells Fargo Global Fund Services has said.

“The Bridgewater deal has led to some institutional investors asking about shadow fund administration.  I doubt many will choose to do this because such a set-up for most managers will be cost-prohibitive,” said Stuart Feffer of Wells Fargo Global Fund Services.

The $140 billion hedge fund’s decision to appoint Northern Trust to shadow the fund administration work undertaken by BNY Mellon, which Bridgewater outsourced its entire middle and back office operations to in 2011, has certainly raised eyebrows in the industry.

The deal will see Northern Trust provide broad middle and back office services including replicating administrative processing, trade processing, valuation, real-time reporting, cash management, accounting and collateral management services.

In February 2013, Peter Sanchez, CEO at Northern Trust’s hedge fund services business in Chicago, predicted shadow fund administration arrangements similar to Bridgewater-BNY Mellon-Northern Trust would become more prolific going forward, although Feffer is sceptical.

“The only managers capable of bearing the cost of this level of oversight and service from multiple administrators are likely to be those running assets under management in excess of tens of billions of dollars. And there are more cost-effective ways of achieving the goal,” said Feffer. 

The deal will give Bridgewater’s investors unparalleled transparency although it will not come cheap. One fund administrator acknowledged the costs would be substantial and questioned whether or not Bridgewater’s investors or its management company would be footing the bill.

An increasing number of managers already perform a degree of shadow accounting internally. A survey by Ernst & Young revealed 90% of investors felt shadow accounting was beneficial to accurate valuation and reporting although barely half said the additional costs were worth bearing.

The media hype around the Bridgewater deal has certainly given a boost to the shadow fund administration debate, although most managers and investors appear reluctant to foot the bill given their thin margins and ever-growing regulatory and operational overhead costs.

However, shadowing would enable a hedge fund to switch administrators quickly were their primary fund administrator to default or run into difficulty, or if they were performing their oversight functions badly.

Nonetheless, Feffer said there were cheaper alternatives to having a shadow fund administrator. “If a manager runs several funds and is concerned about the viability of an administrator, they could  appoint different administrators to different funds. That way, the manager has a relationship with two administrators and can port business easily. Truthfully, if they feel they need to fully shadow they are probably dealing with the wrong administrator in the first place,” he said.

BridgewaterBNY MellonNorthern TrustErnst & YoungWells Fargo Global Fund Servicesshadow fund administration