Northern Trust Gives FOFs Daily Transparency

Date: Wednesday, July 9, 2008
Author: Emma Trincal, Senior Financial Correspondent, Hedgeworld.com

 CHICAGO (HedgeWorld.com)—Funds of funds rarely enjoy daily transparency, but Northern Trust Corp., an investment bank and a hedge fund administrator, is about to change that. Last week, the Chicago bank announced that one of its clients, Auda Hedge LLC, a New York fund of funds with more than $1 billion in assets, would become the first fund of hedge funds to daily position information for its underlying funds.

The announcement may be an overstatement regarding funds of funds—some large funds of funds provide daily transparency by computing numbers themselves in house. But Northern Trust is writing new rules for fund administrators by giving more transparency to its fund of fund clients while moving reporting from the back or middle office to the front office.

Northern Trust is not operating alone. In January, the fund manager struck up a partnership with youDevise Ltd., a London-based software provider that provides web-based portfolio workstations for the financial industry, and notably fund of funds managers Previous HedgeWorld Story.

youDevise has designed online software that enhances data in a fund of funds portfolio by integrating information in real time. Called the Hedge Information Provider (HIP) system, the online portfolio management system improves the timeliness of information fund of funds managers receive from underlying hedge funds regarding holdings, current value, performance and hedging. youDevise is a so-called “software-as-a-service” company, which not only designs applications but also runs them from a web server for its clients while offering full support and maintenance.

The partnership with youDevise will allow Northern Trust, one of the largest fund of funds administrators, to make available to clients daily position information regarding the clients’ portfolios.

The partnership fills a gap that does not originate from the underlying hedge funds but rather from some of the limitations of fund administrators themselves, said Colin Berthoud, sales director at youDevise in London, in an interview.

Additionally, the fund of funds industry has its own shortcomings as it tends to rely too much on spreadsheets and manual information, said Ian Headon, who heads up Northern Trust’s product development for funds of funds in Dublin, Ireland, in an interview.

Administrators Focus on Month-End Figures

“Most of the time, funds of funds already have access to daily positions from their underlying hedge fund managers,” said Mr. Berthoud. “But a typical fund of funds is a quite small organization with 20 to 30 people. Without a system like HIP, they don’t have the staff and the systems to calculate the daily NAV [net asset value].”

So why can’t fund administrators provide the real-time information available from hedge funds? “Most fund administrators tend to provide the NAV at the end of the month. They want confirmed and validated numbers from the hedge funds,” said Mr. Berthoud. “Administrators are more concerned with books and records. They need to be totally accurate.”

Northern Trust is taking an unusual step in what amounts to a new type of service that goes beyond the standard fund administration service.

“In our experience, we found that the fund administration industry operates in a monthly cycle. We wanted to change that,” Mr. Headon said. “By integrating daily price updates with our official monthly reconciliation process, we’re allowing fund managers to reduce their dependence on the spreadsheet.”

Mr. Headon said fund of funds managers operate almost entirely manually because the information they get from hedge fund managers is often itself based on spreadsheets, letters and emails, citing the examples of complex liquidity terms, fees and side letters. “We identified from customers’ feedback and market studies that clients had a need for more robust systems based on automatic and daily trade updates,” Mr. Headon said.

Northern Trust will combine official NAV information, which is typically obtained across the industry two to three weeks after the end of the month, with its new service: providing daily NAV delivered through the HIP system. “We wanted to extend our services in that space to allow clients to manage money,” said Mr. Headon.

Mr. Berthoud gave an example of how better managing money comes into play: “Say you’re a fund of funds portfolio manager and you decide that in a month you want to invest in a new hedge fund. You need to know which existing hedge funds you can redeem from. And it’s not easy to track this type of information down. Each hedge fund has different terms and conditions regarding gates or lock-ups. What this software does is help you keep track of all that.”

The HIP platform can’t always guarantee daily positions since the data depends on what hedge fund managers give; in some cases, the data is not daily but weekly. The level of transparency achieved with the new platform is still superior to that of investors who directly invest in hedge funds. “Today funds of funds tend to be more transparent than hedge funds, which is why they account for about 40% of the industry’s assets,” said Mr. Berthoud. “If our partnership with Northern Trust sets a new trend and if funds of funds are able to deliver daily instead of monthly transparency, then I think that funds of funds will become even more appealing.”

Auda Hedge selected Northern Trust as its administrator and is the first client to benefit from the Northern Trust-youDevise partnership. The size of this manager is representative of the types of fund of fund managers Mr. Berthoud said his firm and Northern Trust will target. Funds with several billions in assets typically can achieve daily transparency in-house and therefore have no use for the new service. On the other hand, small shops can also run the numbers themselves if the number of underlying hedge funds is limited. “To really benefit from a service like HIP, you need to have 30 or more underlying hedge funds. And you wouldn’t be able to invest in so many managers unless you had at least $250 million,” Mr. Berthoud said.

“Northern Trust is able to offer us everything we need under one roof and, in addition, we are particularly excited about the prospect of having daily portfolio management data for our funds-of-hedge-funds for the first time. Both were important reasons that lead to Northern Trust's selection,” said Robert Kirby, chief operating officer of Auda in the release.

Northern Trust had assets under custody of $4 trillion and assets under management of $778.6 billion. The bank, founded in 1889, has 85 offices worldwide.

ETrincal@HedgeWorld.com