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Latest administration survey

Date: Friday, May 30, 2008
Author: Castlehall.typepad.com, Risk without Reward

Hedgefund.net has published a new survey of fund administrators as of Q1 2008. Usefully, the survey breaks our AUA ("assets under administration") between single manager funds and fund of funds: total single manager AUA is stated as $2.759 trillion (representing over 13,000 individual funds), while fund of funds held $1.389 trillion.

Per HFN, the largest single manager administrators are, of course, the usual suspects:

Citco: $482bn
Citi: $227bn
HSBC: $217bn
Goldman: $211bn
BoNY: $149bn
CACEIS: $136bn
UBS: $82bn
GlobeOP: $78bn
PFPC: $71bn

There are some issues with these statistics, however, as there are some very notable absences. Fortis is not mentioned; neither is State Street. The latter have combined their IFS outsourced back office business with Investor Bank and Trust's Investors Fund Services admin group and, per a HFM Week survey as of Q3 last year (see our earlier post), would have had over $300 billion on a combined basis. We wonder if Fortis and State Street simply declined to respond to this particular survey.

This point makes us think of several issues investors should consider when reviewing this type of information about the administration industry.

1) As above, the surveys may have respondent bias: certain firms may choose not to respond.

2) As we have often discussed, not all administration servicing is created equal. There are enormous variations in detailed accounting and, particularly, valuation practices between funds serviced by even the same administrator. Due diligence is always required.
3) Certain administrators continue to focus on the unwelcome practice of NAV Light (under this process, administrators do not maintain their own accounting records, but simply check - to varying degrees - the manager's own NAV calculation.) We continue to believe that the main reason for the popularity of this service is that it allows funds to "check the box" and tell investors that they do have an admin, notwithstanding that there is no full administration servicing. Some investors have policies whereby they will not invest unless an administrator is in place: NAV Light allows funds to meet this criteria, if only on paper.

On this point, investors need to become more discriminating: the point of paying for an administrator is to pay for effective, independent oversight. Investors should not be satisfied with restricted, NAV Light procedures.

4) Certain administrators' businesses have grown more by concentrating on outsourced back office services than fund administration servicing. Running a manager's back office is not the same as acting as a fund administrator: in one situation, you are an outsourced provider for the manager, in the other you are an independent watchdog tasked with protecting investors and ensuring an independent, accurate NAV calculation.

Investors should always ask their administrators a very simple question - who is your client? If the client is the manager, then it goes without saying that the admin's fees should be paid by the manager, not the investor.

5) Consolidation has brought an increase in the number of administration firms owned by prime brokers. This raises two issues: firstly, PB owned firms, in our experience, have the widest exclusions of liability and may accept absolutely no responsibility for pricing, for example. A recognized name does not necessarily mean more comprehensive service.

Secondly, how effective are the Chinese Walls between the admin group and the bank's sales desk? There is an obvious and material conflict of interest if an admin group is cutting a NAV of a fund holding a book of, say, CDO positions which were sold (very lucratively) by the same bank's sales desk. If a fund generates very significant commission and sales revenue, what would happen if the administration group had a significant disagreement with the manager over pricing? Investors need to ask specific questions as to the management of conflicts of interest.

Overall, we continue to believe in the value of effective fund administration. That said, the evolution of the industry is causing us great concern: we see administrators aligning their businesses and services increasingly towards the manager, not the investor, and have noted a very rapid decline in administrator oversight over valuation. These are topics we have discussed before, and, we are sure, are issues to which we will return.