hedge fund operational due diligence corgentum insights valueproposition
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7/31/2019 Hedge Fund Operational Due Diligence Corgentum Insights ValueProposition
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2011 Corgentum Consulting, LLC
Although administrative work may never be as glamorous as the shimmering halls of hedge fundoffices, the additional comfort and added services offered should not be overlooked by Investors andAsset Managers alike. Today, as regulations tighten and the aftermath of 2008 settles, the hedgefund industry is overwhelmed with the demands of operational due diligence and increases intransparency, the control environment, liquidity, and independent oversight. Whereas to successfullyfulfill such demands, Hedge Fund Managers must choose to outsource internal functions andpartner with independent Fund Administration firms. Firms that not only have a proven track recordbut that will also be proactive in adapting their service model to the ever increasing demands of itsclients and their stakeholders.
To provide some further insight, Scott Price, Vice President and Managing Director of Custom HouseFund Services (Chicago) LLC, a global fund administration firm establish in 1989, has provided somebrief responses to questions regarding the changes and valued added services within the fundadministration industry and how Custom House aims to be at the forefront of that change.
What are some of the more major trends you are seeing within the industry?
Consolidation. Similarly to 2011, I believe a major trend in 2012 and onwards will be theconsolidation and acquisition of the smaller boutique or specialist fund administrator firms. This willmost likely result in many independent firms being acquired by larger and longer established serviceproviders. I also expect that the remaining independent administrators will invest heavily into theirtechnology and infrastructure. Fund administrators are now being required to supply morecomprehensive and more frequent reports that are more transparent in nature and focused towardsthe investors. The days of simply producing a valuation and communicating the NAV to the fundsinvestors are somewhat past and we must have an adequate strategy and resources to cope withboth the onslaught of investor transparency demands as well as any regulatory changes. Those thatcannot adapt and provide a saleable solution will become obsolete.
Will this consolidation have any significant operational impact and if so, what is important for managers to know in this regard? Typically, we are seeing firms offer what they present as a one -stop shop to fund managers. So it can be quite attractive for a hedge fund to partner with a firmthat can provide a full suite of different services, whether that be custody, brokerage, administration,compliance support, etc. However, investment managers should be aware that such simple solutionsdo not always equate to the best choice. Of course, many companies can provide superior servicesto a wide range of offerings but a common problem is that a one-stop shop service provider mayoffer poor or limited services in areas that are not their core competency. Therefore, it is important toinvestigate each service individually and ensure that you will not only receive the necessary reportsbut also the necessary customer service and on-going support for each service offering.
Is there value in onsite visits to the Fund Administrator and what are the typical questions youexperience from investors during those visits? Yes, every investor accepts and appreciates theimportance of comprehensive due diligence on a potential manager. However, this is only onecomponent, as all service providers within the wheelhouse of the Fund should be assessed,especially the chosen fund administrator. Overall, managers will do the necessary deep dive beforechoosing their administrator, so it is really up to the investor to ensure this was done to a highstandard and ensure a strong control environment exists in order to produce truly independentvaluations. They should also assess the provider within the framework of business risk, as well asensuring that they work with an administrator who offers a true scalable and customized offering.
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7/31/2019 Hedge Fund Operational Due Diligence Corgentum Insights ValueProposition
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Initially, an investor must simply verify that each manager has an administrator appointed and mostimportantly that they are separate from the manager. You can do this by merely verifying givenaddresses. Also, an investor can ask each administrator for a completed DDQ (and read it!),references from current clients and the SAS 70 document. This will highlight the valuationprocedures, cash controls, segregations of duties (to name a few). It would also be recommended toask for specific contacts of senior management at the administrator and request a call, if not on-sitevisit was scheduled.
Lastly, where do you see the industry heading in the short and long term?In the short and long term I would suspect that regulation will be an absolute challenge for the fundadministration sector. With the JOBS Act expecting to pass and FATCA requirements being rolled outin the near future, this will undoubtedly have an effect on Fund Administrators and their potentialrole. For example, FATCA, with administrators having access to the majority of all the relevantinvestor information it seems appropriate for us to play a critical role with the compliance of suchnew regulations.
Custom House is being proactive to identify exactly who this will affect so that when therequirements are made known we will be prepared to act. This may cause major data maintenanceproblems for other firms that do not have the necessary infrastructure to handle this demand andreport. Scott Price can be reached via email at [email protected]
Originally posted in the May 2012 edition of Corgentum Consulting's Operational Due Diligence Insights .
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About Corgentum Consulting:
Corgentum Consulting is a specialist consulting firm which performs operational due diligencereviews of fund managers. The firm works with investors including fund of funds, pensions,endowments, banks ultra-high net-worth individuals, and family offices to conduct the industry'smost comprehensive operational due diligence reviews. Corgentum's work covers all fundstrategies globally including hedge funds, private equity, real estate funds, and traditional funds.The firm's sole focus on operational due diligence, veteran experience, innovative originalresearch and fundamental bottom up approach to due diligence allows Corgentum to ensurethat the firm's clients avoid unnecessary operational risks. Corgentum is headquartered at 26Journal Square, Suite 1005 in Jersey City, New Jersey, 07306. Phone 201-360-2430. For more
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