Hedge fund operational_due_diligence_corgentum_insights_admin_valuation_independence
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Hedge fund operational_due_diligence_corgentum_insights_admin_valuation_independence

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Originally posted in the February 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

Originally posted in the February 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

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Hedge fund operational_due_diligence_corgentum_insights_admin_valuation_independence Hedge fund operational_due_diligence_corgentum_insights_admin_valuation_independence Document Transcript

  • Fund Administrators and Valuation IndependenceSeveral years ago, certain investors may not have felt the need to actively evaluate a funds serviceproviders. As the importance of the duties performed by fund service providers has gained greateracceptance, so too has the level of attention paid to them. In the current environment, it isconsidered standard practice during operational due diligence to expand a fund review to include notonly the fund management organization itself, but external service providers with which the fundsinteract. One of the most important such service providers is typically the fund administrator.The role that fund administrators play in the operational due diligence process is often a conflictedone. On the one hand, an administrator wants to convey to investors their independence in thevaluation and fund NAV calculation process. On the other hand, administrators are typically hired bythe fund management companies themselves, the same entities and individuals they are supposedto act independent of.As such, during the fund administrator review process, investors may find it beneficial to review notonly the actual operational processes and procedures in place for typical administration servicessuch as fund accounting and shareholder services, but to also gauge the level of involvement andcontrol which a fund manager exercises on this relationship. Consider for example the valuation workperformed by administrators. Many investors may be unaware of this fact, but in determining thevaluations of particular positions most administrators typically have a small degree of discretion.This discretion typically comes into play, when an administrator attempts to price a funds positionsindependently of the fund. For example, lets say a fund managers records indicate that a certainsecurity, which is typically priced via broker quotes, was purchased and was worth $60.23 a share.Lets say that the administrator reaches out to other brokers independent of the fund manager anddetermines the price is $0.01 less than the fund managers price , or $60.23. The administrator mayhave the discretion to override the fund managers price and utilize their own. Most administratorstypically operate within acceptable valuation difference bands. That is a certain amount ofdiscrepancy between the price determined by the administrator and the fund manager is acceptableas long as it is within predefined ranges. In most cases, the administrators price (which is typicallymore conservative), is the one which is utilized. Indeed, fund administration agreements and offeringmemoranda may dictate as such. However, as there is discretion in the process , in practice anegotiation often occurs between the administrator and the fund manager with regards to what thefinal price should be. In certain cases, depending on the nature of the security and the specifics ofthe administration arrangement the fund manager may have final say over the administrator.Some fund managers are actively engaged with their administrators and speak to them severaltimes a week. Others may only talk to their fund administrators at month-end when fund NAVs arebeing calculated. An investor which takes the time to evaluate not only the nuts and bolts of fundadministration procedures but also, the degree of interaction and control exerted by a fund managerin practice may gain useful insights which other investors may not uncover during the operationaldue diligence process.Originally posted in the February 2012 edition of Corgentum Consultings Operational DueDiligence Insights.For More info@corgentum.comInformation Corgentum.com | Blog | Twitter Feed Tel. 201-360-2430
  • About Corgentum Consulting:Corgentum Consulting is a specialist consulting firm which performs operational due diligencereviews of fund managers. The firm works with investors including fund of funds, pensions,endowments, banks ultra-high net-worth individuals, and family offices to conduct the industrysmost comprehensive operational due diligence reviews. Corgentums work covers all fund strategiesglobally including hedge funds, private equity, real estate funds, and traditional funds. The firms solefocus on operational due diligence, veteran experience, innovative original research andfundamental bottom up approach to due diligence allows Corgentum to ensure that the firms clientsavoid unnecessary operational risks. Corgentum is headquartered at 26 Journal Square, Suite 1005in Jersey City, New Jersey, 07306. Phone 201-360-2430. For more information visit,www.Corgentum.com or follow us on Twitter @Corgentum.