Working with the right provider can help ease the process of switching administrators

Date: Wednesday, September 24, 2008
Author: LaCrosse Global Fund Services. Don Murphy

Till death do us part? Working with the right provider can help ease the process of switching administrators.

Making the decision to change administrators is never an easy one. Traditionally, most fund managers only did so in extreme situations. But more and more, managers are realising that it is becoming less about 'till death do us part', and more about ensuring that they have the quality administrative, operational and client support they require - regardless of the short-term inconveniences of a conversion, writes Don Murphy of LaCrosse Global Fund Services.

Many of today's HF managers have evolved well beyond basic domestic equity and fixed income strategies and now trade complex asset classes in markets around the world. They require a partner that can handle these types of transactions and add value through additional services such as middle office operations, valuation support, cash and collateral management, and specialized fund accounting. This trend is forcing a change in the alternative investment services industry. Administrators are evolving as traditional operational services have become commoditized and as hedge funds are raising the bar with respect to their support requirements. Many administrators have moved toward the "factory" model - offering standardized services that include outsourcing and offshoring many of their functions. Newer entrants seek to differentiate themselves through client service and more value-added, full-service offerings. Administrators unable to evolve run the risk of losing clients at best and becoming obsolete at worst.

Why switch?

There are a number of different reasons that may cause a hedge fund to become dissatisfied with its administrator - or simply feel that they have outgrown them. High staff turnover, late production of the NAV or poor implementation of the fund's valuation policy frustrates fund managers, but it also can serve as a red flag, signaling potential problems with the administrator. Equally significant, administrators may fail to evolve in line with the fund's operational requirements (i.e., develop systems and train staff as the fund moves into new asset classes or moves up the complexity curve) or with its funds accounting requirements (i.e., set up of new legal entities, side pockets, etc).

Another fundamental issue that has caused funds to reexamine their providers is cultural fit - or lack thereof. Frustrations in dealing with support staff located abroad, language barriers or time-zone differences can result in a lower level of quality and a client service experience that falls short of a manager's expectations.

The reasons for switching administrators vary, but the intended goal is almost always the same: to find a new provider that offers better, more relevant and/or more comprehensive services. When making the conversion to a new administrator, there are a number of issues that must be addressed. New links need to be built and tested. Existing links to prime brokers and the systems necessary to support the new fund should already be in place since this is a key criterion in administrator selection. Time requirements should also be taken into account. New systems can typically take up to one month for analysis and setup, and another two for live parallel testing (and two month ends) before they are ready to go live. Staff will need training to learn the new systems, and procedures will need to be rewritten. Recognizing these challenges, many administrators have developed conversion methods, tools and training procedures that can help facilitate the conversion of your operations and/or administration functions and that can reduce risk and aggravation.

Investors

One of the biggest barriers to switching administrators are the perceived expenses, time and attention required for the conversion, leading to the old adage "why change something if it's not completely broken" - especially when investors may inquire about the reason for the change. However, even if the fund is performing well, poor service could result in costly operational errors, the wasting of valuable management time, and/or the late or inaccurate production of the NAV - things that over time could significantly impact the fund financially. It should therefore be easy to justify the decision to investors as they should also directly benefit from improved capabilities and service. In addition, operational capabilities and risk have become such important factors - especially for institutional investors - that "upgrading administrators" is quickly becoming an acceptable practice that requires little justification. In fact, many institutional investors and hedge funds-of-funds are requiring that certain hedge funds change administrators or improve their operations and/or administration capabilities prior to an initial or any incremental investments being made by them.

A fund that takes a proactive, consultative approach and engages the investor, explaining the issues and asking their advice, often finds this leads to a greater level of comfort. They may also find the investor is well-versed in the relative strengths and weaknesses of other administrators through investments in other funds and may have strong opinions. Selecting a new administrator that is willing to engage openly with your investors is beneficial. They can provide information, access to management and references to support their due diligence process.

Client Service

When making the conversion, and during the onboarding process, the role of client service is critical. Client service capabilities are a fundamental part of service provider selection. It is essential that they work closely with the onboarding and technology teams, understand the business requirements and develop relationships so that the cutover from testing to production and from old administrator to new is seamless.

It can be difficult to find a provider that can offer extensive capabilities and flexible client service. Ideally, an administrator should provide every fund it services with a dedicated service manager to coordinate day-to-day service delivery and a relationship manager to ensure overall satisfaction. During conversions, client service should be involved from Day One. Relationship and client service managers are both primary points of contact to investigate and resolve any issues that may arise. Clients should also be given specific contact information for individual departments that will be servicing their funds (Accounting, Operations, Cash/Collateral Management, Investor Accounting, Investor Transactions, etc.) in each region around the world where it operates. Providing local client service support can help avoid any issues related to language or time-zone differences.

Finding the right service provider is critical in today's market. Converting data and processes onto new systems is never fool proof, but it need not be a daunting task. An administrator who takes a proactive approach to managing the conversion process can help mitigate the risks while multiplying the benefits.

Don Murphy is Head of Global Client Service for LaCrosse Global Fund Services and is responsible for a global team that provides support for all the firm's hedge fund clients. In addition, Don manages the client on boarding process ensuring a smooth transition onto the LaCrosse platform. Prior to developing this group he was a director in the Product the Management Group of LaCrosse where he was responsible for the development and implementation of solutions for fund administration and middle office services for hedge funds.

LaCrosse Global Fund Services is a provider of operations, middle-office and administration services to managers of complex hedge funds globally. The firm has more than 300 employees in 10 global office locations: Bogotá, Buenos Aires, Caracas, Istanbul, London, Minneapolis, Moscow, New York, São Paulo and Singapore. Current assets under administration are in excess of USD $15 billion, encompassing strategies traded by global portfolio managers who cover fixed income securities, interest rates, credit, foreign exchange, equities, commodities and related derivatives. For more information, visit www.lacrosseglobal.com.