TRIDENT FUND SERVICES
Fund administrators play a vital role in the smooth—and compliant—operation of offshore funds. Andrew Tyson and Rafael Elias outline the advantages of using a third party administrator.
Irrespective of their domicile, type of investment profile or strategy,
all offshore funds need to ensure that the establishment and ongoing operation of the fund are competently and efficiently administered: this is a litmus test for investor confidence.
Today, more investors are performing enhanced due diligence not only
on the fund sponsors, but also on the fund administrator. If investors do not examine the credentials of the administrator directly, they certainly expect the fund sponsors to have carried out this exercise.
While alternative investment funds can undertake the administration
of a fund in-house, best practice today is to outsource the function to third-party administrators for five compelling reasons:
• Independence Appointment of an independent third party to report on the performance of the fund increases investor confidence.
• Focus Outsourcing the administration of the fund enables the fund manager to focus more closely on investment strategy and marketing.
• Skills Offshore administrators generally have a large portfolio of diverse funds under administration, meaning they can bring to bear experience of a broad range of structures, portfolios and reporting requirements.
• Regulatory knowledge Fund managers can rely on the local expertise of the administrators, as they have experience of dealing with the regulatory and corporate requirements of the fund domicile.
• Systems Administrators have in place sophisticated IT platforms and systems which can often be uneconomical for a single fund to maintain.
When selecting an independent administrator, and considering how
that relationship will be managed, a fund sponsor should consider a number of criteria:
1. Quality assurance 2. Personnel 3. Technology 4. Fee structure 5. Subscription and redemption procedures 6. Net asset valuation frequency 7. Regulatory compliance.
Quality assurance Accuracy and reliability are of paramount importance to the position of fund administrator. An administrator that has been independently
examined to a recognised international standard, such as SOC 1, or is subject to external regulation, provides a higher level of assurance that it has strong processes and systems in place that underpin consistent and reliable delivery of services.
Personnel The complexity of fund administration requires people with formal
qualifications and several years of experience. Administrators with well-qualified, experienced teams, with low staff turnover, are in a better position to deliver high quality service. Look also for administrators who assign designated teams and team leaders to the administration of specific funds, which leads to better client service and deeper knowledge of the fund.
Technology The increasing automation of the fund business means that
administrators must have a robust fund administration IT platform in place to meet client needs. Your administrator should have recognised industry-standard software in place, with good hardware and data back-up and recovery procedures.
Technology has an increasingly important role with respect to investor
communications, with investors expecting secure online access to their portfolio details, fund performance and management reports. Administrators should have the ability to communicate information via the web but still be able to ensure investor privacy and security of the information.
Fee structure Fund administrators generally charge for their work in one of two ways:
• As a percentage of the assets held by the fund; or • By the amount of time spent working for the fund. The percentage-based model means the fund sponsor will know,
based on the fund size, what the administration fees are likely to be. However, the sponsor faces higher fees if the size of the fund increases, even if the administration workload changes very little.
Fees charged on a time-spent basis mean that the fund sponsor pays
only for the services that it requires, and the fees do not follow market fluctuations in the value of the fund.
It is generally considered that the time-based approach will normally
result in overall lower costs, but may not provide the certainty looked for by fund sponsors. Administrators who typically charge fees on a time- spent basis will usually agree to a fixed (non-percentage-based) fee after a fund has developed a predictable level of administrative activity.
CAYMAN FUNDS | 2012
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