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

1. Risk vs. Cost
Finding the right balance for
hedge fund administration

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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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