Shadow fund administration on rise
Service providers predict there will be a significant increase in shadow fund administration at hedge funds amid growing pressure from institutional investors.
A small but growing band of hedge fund managers are shadowing outsourced middle and back office functions including trade processing, valuation, net asset value (NAV) calculation, fund accounting, cash and collateral management and reporting.
“We are seeing more managers ask for shadow fund administration on a Bridgewater-lite basis,” said Peter Sanchez, head of hedge fund solutions at Northern Trust in Chicago. In 2013, the $140 billion Bridgewater announced it had appointed Northern Trust to shadow the fund administration work undertaken by BNY Mellon, which the hedge fund had fully outsourced its middle and back office operations to in 2011.
“Such oversight is welcomed by institutional investors although the main challenge is determining the actual cost benefit economics. Factoring in that the cost of business resiliency and future development and resource costs for shadowing and data management are part of the outsourced shadow proposition and many managers and institutional investors are re-evaluating the merits of the outsourced model,” said Sanchez.
Jonathan White, head of business development at Viteos Fund Services in New York, acknowledged shadow fund administration was on the rise. “We are seeing a lot more managers want that extra degree of oversight and this is being driven primarily by institutional investors,” he said.
Sixty per-cent of investors told a 2013 Ernst & Young survey that it was acceptable for managers to use a second party administrator to shadow instead of performing this function in-house. However, 96% of managers said they were not doing this with the majority stating they did not want to cede control of the oversight, nor did they believe the headcount reduction would not be large enough to warrant the additional costs.
“Investing in the internal infrastructure, technology and staff to shadow the work of the administrator internally is costly for hedge funds. It could be argued that appointing a shadow administrator would make economic sense too,” said Sanchez.