Alternative investment fund managers are increasingly using third party fund administrators for back office and middle office services, outsourcing tasks such as accounting and reporting.
For many years, it has been common practice for most hedge funds to have an independent administrator in place, however the number of private equity and real estate funds doing so has been low.
That is changing rapidly with investors preferring independent net asset value calculations and fund managers seeking operational efficiencies. Running back-office fund operations involves complying with numerous regulations and meeting various technology requirements, which is a challenging and time-consuming task.
The key role and main responsibilities of a fund administrator
Typically, fund administration comprises two core components: fund accounting and investor services (also known as transfer agency). A fund's administrator handles all accounting tasks, including keeping records, calculating NAV, fees, and preparing financial statements.
Additionally, the fund administrator handles investor onboarding, subscriptions and redemptions and tracks all investor interests in the fund. They make sure investors get regular updates on their investments, which helps them feel more confident that their funds are well managed.
The administrators will ensure that the official books and records are current, assist with the annual audit, and arrange meetings for investors and directors. Additionally, they will administer the fund's bank account, and handle tracking and payment of fund expenses.
Streamlining operations with back-office hedge fund services
Reliable fund administration is key to a successful investment platform. As a vital middle and back office service, it facilitates the smooth daily operation of a fund. Many investment managers have been choosing to hire external companies to handle their back office hedge fund services due to external pressures and internal operational challenges.. For example, a large number of fund managers are now realizing that doing everything in-house consumes valuable resources.
The ever-changing regulatory landscape, increasing investor demands and rapidly evolving use of technology are additional factors leading to increased outsourcing in the fund administration industry.
Surge of regulations and reporting
The implementation of the Alternative Investment Funds Managers Directive in 2013, the Foreign Account Tax Compliance Act, the Common Reporting Standard and the EU SFDR sustainability regulations, has highlighted the need for fund managers to hire additional resources to remain compliant. Using third-party fund administrators with specialized staff can help them mitigate the risk of staying on top of the ever-evolving environment.
Meeting investor demand and concentrating on core competencies
By outsourcing back office functions, fund managers can focus on their core competencies: investment analysis, selection, and investor relations. Furthermore, institutional investors are demanding that they appoint independent fund administrators to provide independent investment valuations and customized reports.
Costs, economies of scale and efficiency
Fund managers with back office teams have non-revenue-generating tasks that require office space, IT support, staff, and training. Outsourcing these tasks is proven to cut down the costs and improve efficiency.
Even if many consider outsourced solutions expensive, the overall costs are likely to be significantly lower. The administrator can lower costs by servicing multiple funds at the same time. In addition, fund managers have access to more advanced fund analysis and reporting technology.
Technology
Previously, organizations would have managed fund accounting in Excel, but investors are increasingly requiring customized portfolio statements and direct access to data. Today, it’s all based around complex data management, run on specialist fund administration software.
Modern fund administration platforms can track data for fund structures at every level, from the main fund to all the companies in the portfolio.
Fund managers can save money, time, and resources by using third-party administrators to handle technology maintenance and training. This allows fund managers to focus on other aspects of their work, and the cost savings can be passed on to the fund's investors.
Unlock the potential of back-office hedge fund services
Should a fund manager decide to outsource, there must be a clear distinction between what they wish to retain internally and what they prefer to outsource. Fund managers should consider the third-party administrator’s policies, procedures and technology before agreeing to work together. It is vital that the business behavior, beliefs and values between the fund manager and the administrator are in synch.
To find out how we can help you with any outsourcing requirements, please email cyprus@tridenttrust.com