Published in HFM Week - US East Coast 2013

1. FEATURING ACE IT Solutions // Agio // Citi // Concept Capital Markets
// Custom House Group // Dukas PR // EisnerAmper //
Equinoxe AIS Holdings // Marcum LLP // Northern Trust //
Pershing // Sadis & Goldberg // UBS // U.S. Bancorp
REGULATION
The ongoing challenge of global legislative change
TECHNOLOGY
Choosing the right IT provider to meet your needs
DUE DILIGENCE
Stay ahead of the game in managing operational risk
US EAST COAST 2013
WEEKHFMS P E C I A L R E P O R T

2. 4 H FMW EEK .COM
U S E A S T C O A S T 2 0 1 3 CO N T E N T S
FUND SERVICES
PREPARING FOR FATCA
Beth Mueller speaks to HFMWeek about what managers should do
to prepare for Fatca and how U.S. Bancorp Fund Services can help
clients meet these new regulatory requirements
TECHNOLOGY
THE TRUTH ABOUT HEDGE FUND SECURITY
Bart R. McDonough and Christopher Harper talk to HFMWeek about
the security risks hedge fund managers face today, and the benefits
of an integrated IT and security platform
ACCOUNTANCY
FACING NEW TAX UNFRIENDLY PROPOSALS
With US companies facing increasing challenges from tax proposals,
Maury Cartine of Marcum, LLP takes a look at whether the glass is
half full or half empty for investors and managers
SECURITY SERVICES
THE IMPORTANCE OF MANAGED SECURITY
SERVICES
Warren Finkel, of ACE IT Solutions, talks to HFMWeek about the
dangers of cyber risk and why employing security services is
paramount
FINANCE
LIQUID ALTERNATIVES CONTINUE TO OFFER
NEW HEDGE FUND CHANNEL
Richard Webley, of Citi Prime Finance, discusses the progress of liquid
alternatives and their impact on the hedge fund industry
CORPORATE FINANCE
BUYER BEWARE – THIRD-PARTY VALUATION
REPORTS ARE NOT CREATED EQUALLY
Craig Ter Boss of EisnerAmper LLP examines the pros and cons of the
types of reports offered by third-party valuation firms
LEGAL
NEW WORLD FOR EMERGING HEDGE FUND
MANAGERS
Ron Geffner of Sadis & Goldberg, LLP speaks to HFMWeek about
what it takes to be an emerging hedge fund manager in today’s
landscape
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FUND SERVICES
THE BENEFITS OF EMERGING MANAGERS
While fund managers with long track records and large assets
under management may appear a lower risk choice, there can
be a number of benefits to considering emerging managers. Jack
Seibald of Concept Capital Markets, LLC explains
FUND ADMINISTRATION
AN EVOLVING RELATIONSHIP
Mehdi Elofir, of UBS, discusses how the relationship between
investors and their fund administrators has evolved and how it is
expected to continue to grow and develop in the future
FUND SERVICES
PLANNING FOR THE FUTURE
Scott Price, of Custom House, discusses the relationship between
fund managers and fund services administrators
FUND ADMINISTRATION
INTANGIBLE FACTORS IN ADMINISTRATOR
SELECTION
Rod White, of Equinoxe, discusses the key factors to be considered
when selecting a hedge fund administrator
PUBLIC RELATIONS
FREEDOM OF SPEECH
Richard Dukas, of Dukas Public Relations, talks to HFMWeek about
the implications of the JOBS Act on hedge funds
FUND SERVICES
CREATIVITY IN CONTROLS: INNOVATIVE
OPERATING FRAMEWORKS
Peter Sanchez, chief executive officer at Northern Trust Hedge
Fund Services, shares creative ways of leveraging third-party
administration to enhance governance, data quality and resiliency
FINANCIAL SERVICES
THE RISE OF ALTERNATIVE ’40 ACT FUNDS
Aaron Steinberg of Pershing Prime Services speaks to HFMWeek
about the main drivers behind the growth of alternative ’40
Act funds as well as the advantages and challenges of these
structures
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U S E A S T C O A S T 2 0 1 3
T
he relationship between investors in alter-
native funds and fund administrators has
significantly evolved over the last five years.
Previously, investors were mainly focused
on choosing a successful and reputable in-
vestment manager and they left the decision
of choosing an administrator with the funds investment
manager. Often, the only contact investors had with an ad-
ministrator was when sending subscription and redemp-
tion requests or receiving contract notes and their monthly
Net Asset Value (NAV) reports. The interactions between
investors and administrators have changed over time with
more due diligence visits and increased transparency re-
porting.
Administrators are typically paid by the fund, and in-
directly by its investors. It is therefore no surprise that
investors are increasingly influencing the administrator’s
selection process. This is true in the case of single investor
funds, also commonly referred to as ‘fund of ones’. It is also
done indirectly via industry consultants who represent
investors and set the standards for the operational infra-
structure and the service providers of a fund. Indeed, over
the last few years, with the increased popularity of fund
of ones and managed accounts, administrators have been
establishing relationships directly with large institutional
investors and catering specifically to their needs such as
customising reports and communications to meet their
requirements.
Before addressing how an investor should evaluate an
administrator, it is important for investors to first ensure
they understand the role that an administrator plays in
protecting the interests of the investors and how a repu-
table administrator can add significant value for investors.
Unfortunately, there can be an expectation gap between
what investors think administrators do and what they ac-
tually do. Therefore it is important to know the roles and
responsibilities of all service providers of a fund, including
but not limited to the administrator.
So how should an investor evaluate an administrator?
The first step is to understand the services that admin-
istrators can provide to the fund and its investors. Ad-
ministrators offer varying levels of services. The offering
memorandum has a description of services provided by
the administrator to the fund. There are typically three op-
tions for levels of service: 1) full administration, 2) NAV
lite administration or 3) investor-only services. The first
option of full service fund administration, which includes
the preparation of a complete set of accounting books and
records of the fund, is the most common option, as it pro-
vides investors an independent calculation of the NAV.
The second option of NAV lite administration consists of
reviewing the investment manager’s own accounting re-
cords.Thereisalackofindustrystandardsastothereviews
that an administrator performs under a NAV lite model
but often, this would signify that the administrator does
not keep independent or separate books and records and
only reviews the investment manager’s books for reasona-
bleness. This option frequently does not meet strict due
diligence standards of most investors. Since the financial
crisis, many administrators have moved away from offering
NAV lite administration. The third option of investor only
services means the administrator handles the investor side,
which includes processing subscriptions, redemptions and
performing anti money laundering and know your client
checks (commonly referred to as AML/KYC), but is not
involved with the fund accounting. Investors should vali-
date the level of service that the administrator provides on
a periodic basis during their due diligence visits and not
rely solely on the offering memorandum.
DUE DILIGENCE
After understanding and becoming comfortable with the
level of services that their potential administrator is pro-
viding, investors should then perform their own due dili-
gence. The goal of due diligence is to assess the culture of
the administrator and their control environment. Obtain-
ing evidence of a strong operational infrastructure, focused
culture around controls and robust operational framework
is a great start to getting investors the level of comfort they
require. To do so, investors should review the Service Or-
ganization Control Report commonly referred to as SOC
1 report and an Alternative Investment Management As-
sociation (AIMA) questionnaire or equivalent. The AIMA
questionnaire has become the industry standard and con-
tains answers to key questions on the administrator for in-
vestors and investment managers. The SOC 1 report also
provides great insight into an administrator’s procedures
and processes. There are two types of SOC 1 reports, type
1 and type 2, both of which are issued by an independ-
ent audit firm. A type 2 report gives an investor the most
comfort, as the controls described in the report are tested
throughout the period by auditors. The SOC 1 report is a
carefully drafted document and investors should pay close
attention to the report to understand what is covered and
MEHDI ELOFIR, OF UBS, DISCUSSES HOW THE RELATIONSHIP BETWEEN INVESTORS AND THEIR FUND ADMINISTRATORS HAS EVOLVED AND HOW
IT IS EXPECTED TO CONTINUE TO GROW AND DEVELOP IN THE FUTURE
AN EVOLVING
RELATIONSHIP
Mehdi Elofir,
Chartered Financial Analyst®
and Certified Management
Accountant, is head of
UBS Fund Services in New
York. He has over 12 years’
experience in the hedge
fund industry.

4. F U N D A D M I N I ST R AT I O N
H FMWEEK .COM 31
what is not. SOC 1 reports can cover anywhere
from a few key controls at the administrator to all
of them so not all SOC 1 type 2 reports are created
equal. Investors should also contact the adminis-
trator directly if they have any questions with re-
gards to the control environment or testing results.
In conjunction with the above, administrators
should have robust, transparent and well docu-
mented valuation procedures. Investors should
pay particular attention to special disclosures on
their investor statements as they may include areas
that the administrator wanted to emphasise such
as disclosures on valuations for investments that
the administrator was not able to validate inde-
pendently or illiquid positions. These disclosures
are important and may highlight an issue that the
investor should take into consideration when as-
sessing their investment and may prompt further
discussions with their investment manager or ad-
ministrator.
Another important factor to understand is how
the administrator balances its dual role as an extension of
the manager’s back and middle office and as an independ-
ent party with responsibilities towards investors. All com-
mon sense questions such as reputation, how long the
administrator has been in business and their client base
should be considered. One of the most important consid-
erations is to make sure that the administrators revenues
are not concentrated or mostly derived from one or a small
group of clients. An administrator with a diversified rev-
enue base and sound cash flows may be in a stronger posi-
tion to challenge an investment manager, if necessary.
The administrator’s ability, based primarily on its
technology capability to extract information and
provide transparency to investors, should also be
assessed. Detailed information on the portfolio in-
cluding counterparty exposure, liquidity levelling
of securities and pricing sources, is valuable infor-
mation to investors. Previously this transparency
reporting may have been provided by their invest-
ment manager, however, investors are increasingly
demanding that this information be provided
independently from their administrators. It is ex-
pected that reports such as Open Protocol Ena-
bling Risk Aggregation (OPERA) will continue
to gain in popularity among institutional investors
and may eventually become an industry standard.
The relationship between investors in alterna-
tive funds and their administrators has changed.
Large investors, especially those who invest in
fund of ones or managed accounts, are influencing
their investment manager’s decision as to which
administrator to choose. All investors regardless
of size, are performing some level of due diligence
on their administrators. Investors should, at a minimum,
review their fund’s offering memorandum to understand
the level of services provided by the fund’s administrator.
Those who wish to delve deeper can request an admin-
istrator’s SOC 1 audit report or AIMA questionnaire. If
desired, investors can also contact administrators directly
to perform their own due diligence calls or meetings. In-
vestors of all sizes are utilising administrators more, as
they are in a unique position to deliver independent and
increased transparency reporting. In the future, the scope
and frequency of reporting to investors will continue to
increase and the relationships will continue to evolve.
IN THE FUTURE, THE
SCOPE AND FREQUENCY
OF REPORTING TO
INVESTORS WILL CONTINUE
TO INCREASE AND THE
RELATIONSHIPS WILL
CONTINUE TO EVOLVE
”