Outsourcing Hedge Fund Administration

The hedge fund industry is larger than ever, with total assets under management (AUM) of $5.6 trillion, according to HFR’s latest Global Hedge Fund Industry Report. HFR reports a total of 562 new funds created last year.

We’re seeing increasingly complex fund structures emerge, with multi-strategy, series, multi-manager, and hybrid funds all now part of the hedge fund landscape. Many funds span multiple jurisdictions, such as a fund with a Cayman master and Delaware, Ireland, and Singapore feeders.

Hedge fund administrators can expertly and efficiently handle much of the operational complexity of the accounting, onboarding, allocation, and reporting for these complex funds. While you may be able to manage these functions in-house, many fund managers have found that outsourcing to a professional administrator is more cost-effective, provides a layer of transparency and professionalism, and offers faster and more accurate reporting.

What a hedge fund administrator does

Hedge fund administrators are outsourced service providers who provide back-office operational support for funds. Independent administrators are so beneficial that about three-quarters of all private funds use one, according to data from the SEC, as reported by the news and analytics site Private Funds CFO.

Common fund administration responsibilities include:

Fund accounting and NAV calculation: financial records and statements, daily or monthly Net Asset Value (NAV) calculations for traditional or digital assets
Compliance: Support for common regulatory filings in your fund’s jurisdiction, investor identification, tax reporting
Transfer agency services: Investor onboarding including anti-money laundering (AML) and Know Your Client (KYC) checks; share subscriptions and redemptions; maintenance of the shareholder register; contract notes and settlement of proceeds; application of notice periods, gates, and lock-ups
Investor services: Account statements, distributions, capital account reporting, responses to investor inquiries and due diligence requests, and distribution of fund reports and manager communications
Allocation services: Complex fee setups and calculations, including incentive fees, preferred returns, and waterfall structures; and for digital assets, allocating block trades fairly across accounts
Tax services: Tax support that could include withholding and reporting; Schedule K-1 and K-3 preparation; and PFIC, CFC, and FDE compliance

Explore Award-Winning Hedge Fund Administration

Independent valuation earns investor trust

A third-party fund administrator tends to increase investors’ level of trust in a fund. In fact, most large institutional allocators require a third-party provider and make it part of their due diligence process when evaluating hedge funds.

One benefit of an outsourced provider is the reduced risk of fraud. A fund administrator independently verifies all transactions, adding another set of eyes to valuation data. Hiring a fund administrator also creates a clear division of responsibilities with the fund manager. Investors are reassured when a fund offers this additional oversight and transparency.

Another benefit is the investor portals most admins provide. These portals can be white labeled with your firm’s name and logo, and enable investors to log on at their convenience and see onboarding progress, access regular statements and updates, or ask questions.

Reporting that holds up under investor scrutiny

An experienced fund administrator will generate accurate, on-time reports for your fund. Reliable reporting is essential if you manage a multi-strategy or multi-manager fund that generates massive amounts of data from dozens to hundreds of prime brokers and portfolio managers.

Since hedge fund administrators work with technology designed to aggregate hundreds of thousands of daily trades, their infrastructure is designed to quickly generate reports and, more importantly, provide accurate numbers. Often, data can be configured across class and share levels or date ranges. Administrators can also provide specialized reporting for RIAs, broker-dealers, custodians, or third-party systems.

Administrators typically offer extensive libraries of reporting templates for diverse funds and structures as well as customizable formats. In some cases, you may be able to create on- demand reports.

Operational capacity without added headcount

Many fund managers keep back-office tasks in-house when starting out. As you increase your investor count though, you may easily double or triple your operational work — onboarding new investors, managing AML and KYC protocols, and answering investor questions. Your reconciliations, allocations, and reporting are still due on a fixed schedule whether you have a team of two or twenty.

Administrators will scale with your fund, providing the same month-end reporting no matter how many investors or complex fee arrangements you have in place.

Bringing a fund administrator onboard will change what your team can focus and spend its time on. Your CFO can now review the numbers instead of producing them, and your investment team no longer gets pulled away to assist with operational tasks at month-end close.

Support for complex and multi-strategy books

Hedge fund administrators typically have experience with complex fund setups, like side pockets, multiple share classes, cross-asset portfolios, and digital assets, offering a range of comprehensive services:

Complex fee arrangements: Outsourced providers make it easier for fund managers to support complex fee arrangements for investors because they can calculate high-water marks, hurdle rates, and tiered or blended fees at the investor level rather than the fund level. Managers won’t have the burden of manual tracking or restatement worries at year-end.
Multiple share classes and side pockets: Admins can valuate and allocate new series and separately track side pockets, limiting participation to qualifying investors.
Cross-asset portfolios and digital assets: If you have a range of assets like equities, fixed income, derivatives, or digital assets, administrators can offer pricing and reconciliation for each even with multiple prime brokers or custodians. Additionally, administrators experienced with digital assets services can provide wallet verification and on-chain reconciliation.
Multiple jurisdictions: Multi-jurisdictional funds commonly use a master/feeder structure, with onshore and offshore feeders investing into a single master fund. This requires accounting for each level, financial statements prepared under different accounting standards, separate local filings, and tax reporting that varies by domicile. An administrator will handle the structure from end-to-end, so you can accept investors from multiple jurisdictions without worrying about building the necessary compliance infrastructure in-house.

Choosing an administrator

Choose an administrator for hedge funds in a similar asset class and strategy as your fund. With a proven track record, you can be more confident the administrator you choose can navigate the specific challenges and complexities your fund may face.

You’ll also want to consider an administrator’s reputation in the industry, its tech stack, the level of investor services offered, and the length of tenure of its account representatives. Often, your legal counsel, prime brokers, or other fund managers can recommend reputable administrators.

NAV Fund Services has provided hedge fund administration since 1991, and our award-winning client team (with an average of 15 years of experience) supports strategies including long/short equity. quant, event-driven, managed futures, and multi-strategy.

Our clients benefit from our proprietary, state-of-the-art technology, including all-in-one client portals, e-subscription and data room features, API capabilities, daily reporting typically delivered by 6:30 AM ET of the next business day, and an official NAV within 2 working days of period end for 80% of our funds.