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Risk vs. Cost
Finding the right balance for
hedge fund administration
What we'll discuss
AGENDA
1. Cost vs. risk: Finding the right balance for your fund
2. Taking a fresh look at operations
3...
The current environment
INTRODUCTION
Opportunity
• Total AUM already higher than 2007 levels
• Many new smaller funds laun...
Cost vs. Risk
1. MANAGING COSTS
How can my fund best meet
regulatory requirements
without overspending?
a) Engage a third-...
“Fund managers who adopt a full in-
house shadow approach often find that
having a dedicated team under their
roof helps t...
What should you look for in
an administrator?
• Flexible technology platform for ease
of data analysis
• Bundled services,...
Taking a fresh look at operations
To guide the evaluation process, consider
the following areas:
• Administrative costs
• ...
2. OPERATIONS
“Developing a cost-efficient model
means determining what to keep in-house,
what to outsource and what to sh...
What functions should I shadow?
3. SHADOWING
Every fund is different, but these should take precedence:
• Subscriptions an...
Choosing the right administrator
Administrative cost model x high priority areas = best fit
“The first step is getting ref...
Choosing the right administrator
Consider these factors:
• What tasks will you outsource?
• What capabilities work best fo...
4. SELECTION
“When your fund starts to grow,
that is when you bring those
close-to-alpha processes, such
as portfolio reba...
Last words
Balancing risk & cost
• It's a living proposition – examine risk
appetite regularly to ensure that
administrati...
CONTACT US
Michael Patanella
Partner, National Asset
Management Industry Leader
T 212.624.5258
E Michael.Patanella@us.gt.c...
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Cost vs. Risk: Finding the right balance for hedge fund administration

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Hedge Funds—Taking a fresh look at operations: How hedge fund managers can engage the right mix of internal, outside and shadow administration. Read the full paper at http://gt-us.co/1rjV3Se

Published in: Economy & Finance
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Transcript of "Cost vs. Risk: Finding the right balance for hedge fund administration"

  1. 1. Risk vs. Cost Finding the right balance for hedge fund administration
  2. 2. What we'll discuss AGENDA 1. Cost vs. risk: Finding the right balance for your fund 2. Taking a fresh look at operations 3. What functions should my fund shadow? 4. How do I choose the right outside administrator? 5. Last words 2
  3. 3. The current environment INTRODUCTION Opportunity • Total AUM already higher than 2007 levels • Many new smaller funds launching, particularly with AUM >$100 million Challenges • Managers under pressure to cut fees • Compliance and regulatory costs are high— could rise by as much as 20% over next 3 years 3
  4. 4. Cost vs. Risk 1. MANAGING COSTS How can my fund best meet regulatory requirements without overspending? a) Engage a third-party administrator b) Use in house resources c) A mix of both 4
  5. 5. “Fund managers who adopt a full in- house shadow approach often find that having a dedicated team under their roof helps to align fund operations and portfolio management. The downside is scalability; there is a fixed cost associated with this approach that may be problematic in periods of declining assets.” - Kristin Castellanos Global Head of Product Management Deutsche Bank Fund Services “Large multibillion-dollar hedge funds often have both an outside administrator and a full in-house shadow function that completely duplicates the outside administrator’s work. Although much costlier, the resulting risk reduction means this is a trade-off they are willing to make.” - - Michael Patanella - National Asset Management Sector Leader Grant Thornton 1. MANAGING COSTS 5
  6. 6. What should you look for in an administrator? • Flexible technology platform for ease of data analysis • Bundled services, such as regulatory reporting and/or depositary services. • Consolidated technology platform for repurposing data at a lesser cost “Leveraging a third-party administrator can help emerging funds achieve economies of scale. At the same time, third-party administrators can improve the manager’s ability to set themselves apart in an environment of stringent investor and regulatory due diligence requirements.” - - Fred Jacobs - Managing Director of Global Business Development for Alternative Investments SS&C GlobeOp 1. MANAGING COSTS 6
  7. 7. Taking a fresh look at operations To guide the evaluation process, consider the following areas: • Administrative costs • Administrative data • Outsourcing agreements • Deadlines • Mix of service offerings • Data access • Vendor qualifications 2. OPERATIONS 7
  8. 8. 2. OPERATIONS “Developing a cost-efficient model means determining what to keep in-house, what to outsource and what to shadow. Finding the right mix for your fund reflects the needs and preferences of your leadership team, your investors and regulators — in the end, investors and regulators will examine whether the fund is maintaining the right amount of oversight to keep risks at a manageable level.” - Michael Patanella, National Asset Management Sector Leader, Grant Thornton 8
  9. 9. What functions should I shadow? 3. SHADOWING Every fund is different, but these should take precedence: • Subscriptions and redemptions • Asset valuations • Regulatory compliance • Cash management • Risk management vendor oversight • Collateral and margin management • Foreign exchange hedging • Portfolio rebalancing • Reporting for profit and loss, position and risk reporting • Internal analytics “A good way to think about what to shadow is by asking yourself, ‘What is most important to my investors?’” - Peter Sanchez CEO, Northern Trust Hedge Fund Services 9
  10. 10. Choosing the right administrator Administrative cost model x high priority areas = best fit “The first step is getting referrals from other managers and auditors to create an initial list of 3-5 strong possible matches. Next, set up an initial meeting to get a sense of the administrator’s approach, and narrow the focus to two. The final decision revolves around three key external factors: (1) the amount of technology and staff the manager has in-house and how the administrator can supplement it, (2) the type of investor the fund is seeking to attract as it grows, and (3) the complexity of the fund and the ability to manage this complexity in-house.” - Fred Jacobs, Managing Director of Global Business Development for Alternative Investments, SS&C GlobeOp 4. SELECTION 10
  11. 11. Choosing the right administrator Consider these factors: • What tasks will you outsource? • What capabilities work best for your fund? • How do they stack up to their peers? • What technology are they using? • How do they communicate? • What are the particular needs of your fund? 4. SELECTION 11
  12. 12. 4. SELECTION “When your fund starts to grow, that is when you bring those close-to-alpha processes, such as portfolio rebalancing and rebate optimization, back in- house. A mature fund needs an administrator with strong data aggregation and data management capabilities. So it is all about the life cycle of the fund" - Peter Sanchez, CEO of Northern Trust Hedge Fund Services 12
  13. 13. Last words Balancing risk & cost • It's a living proposition – examine risk appetite regularly to ensure that administration and costs remain at an acceptable level. • Investors need access, transparency and demonstrated risk levels that provide a comfort level that keeps their investment with you. • Re-evaluate administrator structure often and remain flexible to your growth, your customers, and new regulation. 5. IN CLOSING “Remember that you are building a long-term relationship. Look for a comprehensive service offering and a flexible technology platform.” - Kristin Castellanos Global Head of Product Management Deutsche Bank Fund Services 13
  14. 14. CONTACT US Michael Patanella Partner, National Asset Management Industry Leader T 212.624.5258 E Michael.Patanella@us.gt.com GRANT THORNTON NATIONAL ASSET MANAGEMENT LEADER The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory membership organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity. In the United States, visit Grant Thornton LLP at www.GrantThornton.com. 14
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