The role of the Fund Administrator in today’s markets

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The investment environment

Capital markets and the investment environment have never been so complex and challenging as nowadays. Investment products constantly reach new forms on ingenuity in their endless effort to capture positive performance. New structures emerge every couple of years, sometimes adding value to the industry and sometimes destroying a big part of it.

The world, only eight years ago experienced a near-depression financial crisis that brought the global financial system to its knees. Most countries are still trying to recover and in their desperation resort to sub-par measures such as ZIRP (zero interest rate policies) and QEs (quantitative easing or endless money printing for the average person). After a number of major scandals and collapses in the industry (see Bernard Madoff, Peregrine Financial Group, MF Global, Stanford Financial Group, among others), regulators world-wide implemented new extensive regulatory measures sometimes really effective, sometimes just for the sake of added regulation and sometimes bringing back old legislation that should never have been abolished (e.g. the separation of investment banking from commercial banking).

The role of the Fund Administrator

So, in such a dramatically changed investing environment, what is the role of the fund administrator and how should an administrator cope with such a different investment landscape. To answer this question we need to define the role of the fund administrator as an investment intermediary and how is this service provider adding value to the investment business value chain.

The fund administrator is in effect the independent service provider that stands between the investment manager and the investor. Before investors decide to invest, as part of their due diligence they need to address a number of issues including: (a) the investment is expected to have good performance for the risk they take (b) the measurement of such performance will be reliable and robust and (c) the custody of their holding will be in good hands. The investment manager cannot undertake all three roles as there is a major conflict between these three functions. So the fund administrator steps in as a service provider independent from the investment manager to undertake the calculation of performance that the manager generates as well as take custody of the register of investor holdings. Trust is an essential ingredient in the investment process and only when the investment structure becomes trustworthy will investors be induced to make their investment allocations.

Functions of the Fund Administrator

Some of the main functions of a fund administrator include:

  • Fund accounting and calculation of Net Asset Values for the funds and maintenance of official books and records of the Fund;
  • Act as transfer agent and maintenance of the share register;
  • Processing of subscriptions, redemptions, transfers and switches;
  • Issue investor statements and other investor reporting requirements;
  • Regulatory and tax compliance on behalf of the funds and the investment manager;
  • Assist in the preparation of statutory financial statements and liaison with auditors;
  • Process dividend and other distributions;
  • Provide middle office services (e.g. portfolio reporting);
  • Fund structuring, set up and investment manager consulting;
  • Processing of income collections and settlement oversight;
  • Ad hoc consulting on exceptional events such as: fund voluntary liquidations, valuation of hard-to-value portfolios, side pockets administration, fund restructuring, Fund re-domiciliation, etc.

fund-administration-workflow

Qualities of the Fund Administrator

In this context and as a result of the developments in the investing landscape noted above, the investment industry has become quite self-regulated in recent years. Investors themselves demand the separation of portfolio management from fund administration otherwise they will not even look at the proposed investment. Investors go deeper though, as part of their due diligence, and demand that a credible, well-established and structured fund administrator undertakes the administration for the investment funds. The fund administrator needs to demonstrate both to the investment manager as well as the investors that the following five objectives are consistently met:

  • it acts in a totally independent manner to the investment manager;
  • all information received from the investment manager is externally verified;
  • it has a very strong internal control environment;
  • there is clear segregation of duties; and
  • there are formal processes consistently applied.

Of course this is not an exhaustive list. In practice, the role of the fund administrator is way more challenging. Taking into account the functions it performs, in effect the administrator is rendered as one of the most strategic advisors to the investment manager. Still it has to remain impartial and independent in servicing the fund administration mandates and establish a credible environment between the investment manager and its investors.

Fund administrators that have managed successfully this delicate balance, have created significant brand value around their name in the fund administration business and recognition among investors which in turn attracts business from investment managers worldwide.

Implications for Cyprus

The additional regulation and compliance costs introduced worldwide during the last couple of years as well as investor demands for the use of reliable and reputable fund administrators have rendered fund administration and compliance an important part in the funds’ cost base. The problem is more intense with small funds and emerging investment managers where fee minimums take away a serious percentage of the asset base. At the same time the scarcity of good yields, have created additional investor pressure for better investment returns. This adds a further push to investment managers to seek for low-cost, reliable, fund administrations.

This is a once-in-a-lifetime opportunity for Cyprus to bridge this gap. A country with abundance in accountants and relevant professional advisors can offer, in time, reliable fund administration at a fraction of the cost provided in incumbent fund administration centres such as Ireland and Luxembourg. With a carefully designed regulatory framework for fund administrators, a gradually crisis-free economy coupled with a robust infrastructure, high quality human capital and above all relevant professional development, training and support, Cyprus can and should play a significant role in the world-wide fund administration industry.

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