If you outsource your fund administration, your vendor’s technology is a make-or-break component of the relationship. Some fund administrators have developed proprietary tech in-house, while others license third-party systems. While both solutions have pros and cons, there are differences you should understand and carefully weigh between the customization, security, and control of in-house and third-party tech.

What is Fund Administration Technology?

Fund administrators use a technology platform to perform various components of their back-office tasks: fund accounting, NAV calculations, API configurations, and data room offerings, among others. They also manage investors’ access to their portals to upload documents for Anti-Money Laundering (AML) and Know Your Client (KYC) compliance, reporting, 24/7 access to account data, and customer service concerns. These portals can sometimes be white-labeled to provide your investors with a seamless login experience and showcase your fund’s branding.

Proprietary vs. Third-Party Technology

Admins typically favor one of two core technology models to run their systems — proprietary or third-party systems.

Proprietary systems are also known as in-house systems because, as the name suggests, they’ve been fully developed in-house. They are owned and operated by the fund administrator and managed by an in-house IT team.

Some fund administrators may instead pay to license third-party technology because they don’t have the systems to support full fund administration functions, nor the internal team to manage and maintain it. Outside vendors provide those technology solutions for a fee.

A few admins use proprietary systems exclusively, but that scenario is fairly rare. Most actually use a combination of in-house and third-party systems — a hybrid solution — to run specific services, for example, NAV calculations, compliance, and investor communications.

Be aware that technology represented as “proprietary” in-house platforms may really be third-party software systems that were acquired by the fund administrator. While an in-house tech team now oversees the tech and you may see benefits in terms of speed and control, a purchased system is slightly different from in-house technology developed from the ground up.

What Is Proprietary (In-House) Fund Administration Technology?

If a fund administrator has proprietary technology, that means they own and have developed it in-house. It’s purpose-built for fund administration tasks, not modified or tweaked from other functions. The administrator’s in-house IT staff maintains and upgrades the system. Often, it’s an all-in-one platform, so you’ll only need to login once.

The tech enables API connectivity across a variety of endpoints, minimizing data silos that can create reporting delays.

It also results in lower fees for clients, as there are no third-party licensing fees to pay or integration and development costs to pass on. It may also be more customizable, since changes are made on-site by the administrator’s development team.

What Is Third-Party (Licensed) Fund Administration Technology?

When a fund administrator licenses their technology from an outside vendor, that’s considered third-party technology. The admin must pay licensing fees, as well as any integration and development costs, which are typically passed on to clients.

Third-party tech often relies on point-to-point integrations across different systems, so data can be siloed and reporting can take longer.

Upgrades and features roll out on the third-party vendor’s schedule. If a client needs a flexible solution, it may not be possible to accommodate the customization required. The admin may also have less control over security and compliance since they’re working with an outside vendor.

Proprietary vs. Third-Party: Side-By-Side Comparison

Proprietary systems are developed in-house by fund admins, but truly ground-up proprietary systems are rare. Many administrators instead choose one or more third-party systems to provide their technology .

Benefits of Proprietary Fund Administration Technology

Since portals, processing, and reporting all take place on technology that’s been developed together, you’ll enjoy faster, more customized tech solutions, and generally a smoother platform experience with proprietary technology.

Control and Customization

Your fund admin can accept special requests, often with no added cost. It’s also much easier to white label the portal and create customized reports. Proprietary systems allow administrators to design workflows, tailor reporting formats, and prioritize development around their clients’ needs, rather than being at the mercy of a vendor’s timetable.

Faster Fixes and New Features

Expect new features and fixes to launch regularly with a proprietary system, like investor communication upgrades, e-subscriptions, and automatic bank integrations. There are minimal delays and disruptions since everything is developed in-house. Many administrators with proprietary technology offer these updates at no additional cost.

Tighter Data Integration and Reporting

If you need data integrated from multiple APIs or have complex trading scenarios, a fund admin with in-house technology can generate reports much faster, as data passes through one integrated technology platform versus multiple systems or platforms.

Cost and Fee Impact

With a proprietary tech system, you likely won’t have to absorb passthrough costs for third-party licensing or integration added to your fund admin fess, so that saves you money.

Data Security and Data Ownership

A proprietary system keeps control over data pipelines and compliance information with your fund administrator, meaning less risk of a third-party data breach.

Benefits and Trade-Offs of Third-Party Systems

While there are many benefits of proprietary systems, third-party administration technology offers some advantages as well, especially for administrators managing diverse client bases with a range of operational needs. Because these systems are built by vendors serving many types of clients across the alternative investment industry, they often come with mature functionality that might take years to develop in-house.

The cost of research and development is also typically spread across a much larger client base, since multiple companies use the same technology, allowing smaller administrators access to technology that might otherwise be cost-prohibitive. And because vendors have likely encountered unique issues from a range of clients, their systems sometimes handle edge cases and regulatory nuances that a smaller in-house team might not have the bandwidth to address.

The major trade-off is a loss of control. The fund administrator is dependent on the vendor for the timing of system upgrades, and customization is limited to what a vendor’s system is capable of, not necessarily what a client needs. The admin’s business is also dependent on the vendor’s security protocols and operational status — if there is a security breach or downtime incident, they’re at the mercy of the vendor to fix it.

Technology Choice by Fund Type

Technology requirements will vary by fund type, since each carries different reporting and operational needs.

Crypto / Digital Asset Funds

Digital asset funds and cryptocurrencies require technology with robust API capabilities to capture blockchain and exchange transactions from multiple systems on a real-time basis. Their quality of a fund administrator’s tech will be reflected in their digital asset reporting capabilities — the best offer tax lot and segregated daily reporting. Investors should be able to securely upload API keys and wallet addresses in an administrator’s portal. Admins in this space need technology that can quickly adapt to an evolving regulatory landscape. Third-party platforms may be offered alongside specialized tech for digital asset funds to handle standard admin functions like fund accounting.

Private Equity Funds

Private equity funds demand technology that can support complex, illiquid structures and detailed capital calls and distribution waterfalls. Admins with proprietary systems can build unique workflows tailored to specific funds’ structures. Third-party platforms with strong private equity capabilities offer support for more standard fund structures.

Hedge Funds

Hedge funds technology must be capable of handling large transaction volumes and rapid reporting. Direct API connectivity between trading, accounting, and reporting systems allow for faster reporting turnaround times. Third-party technology designed for hedge funds can normally provide adequate functionality for a wide range of fund strategies.

How To Evaluate A Fund Administrator's Technology

If you’re switching administrators or evaluating your current administrator, ask the following questions for a better idea of how robust and flexible their tech stack really is:

• Is your technology proprietary or licensed? If it’s proprietary, is it an acquired third-party software or was it completely developed in-house? The answer here indicates how customizable the system is to your fund’s requirements.
• Who controls the timing of new releases or fixes? If your administrator is in charge, expect much faster turnaround times; but if a vendor is in control, there may be delays.
• Do you offer API access for a variety of endpoints? The answer reveals how easy it will be for your administrator to connect with multiple data sources, a capability that is especially important for digital asset funds.
• What are your security certifications? This will give you an idea of how seriously your admin takes sounds operational processes and data security.
• What’s your reporting uptime/turnaround? If the answer is “daily,” you’re in good hands. If your admin is vaguer about turnaround times, you may not consistently receive timely reports.

Where NAV Fits

NAV Fund Services has exclusively offered proprietary technology from the beginning. We build and maintain our all-in-one technology platform in-house, supported by a team of 400+ IT professionals including software engineers, cybersecurity experts, and disaster-recovery specialists. To name just a few of our proprietary features, we offer a customizable investor portal, mobile app, E-subscription, data room, and on-demand reporting. NAV is ISO 27001, ISO 27701, ISAE 3402 Type II, and SOC2 certified. Daily reporting is typically delivered by 6:30am ET the next business day.

Our 2,550+ clients trust us with more than $450 billion in AUA, and we boast a 99% client retention rate. We work with hedge funds, private equity, venture capital, real estate, and private credit funds, and are the world’s largest digital assets administrator, with a market share of more than one-third of all digital asset admin. We can work with almost any fund strategy, no matter how niche. Reach out to learn what our proprietary technology can do for your fund.