As large prime brokers and some legal and accountancy firms offer administration services, how will this impact on global fund administrators?

Akshaya Bhargava at Butterfield Fulcrum says the primary benefit of third-party administrators is to provide independent fund accounting services. “If the administrator is linked to the prime broker or accountancy firm, then there is a risk that there will not be real independence in the booking and reconciliation on trades and the valuation/net asset value (NAV) calculation process,” he says.

“We consider the independence of the administrator to be a defining quality,” declares Oliver Scully at Citco. “As more administrators are established, the focus on capabilities and quality of service will continue to distinguish the most successful operators,” he says.

“Large prime brokers definitely can affect the choice of administrator if they have an administration division themselves,” notes Dermot Butler at Custom House. “However, many investors are nervous of being handcuffed if they choose an administrator who is also their prime broker.” Butler warns that if the prime broker’s division wants to close the fund’s account, then it is likely the administration arm will also want to sack the client. Although most of the prime brokers who have administration divisions offer a good service, this is a risk that should be considered, he notes.

He is somewhat dismissive of lawyers entering the business. “Without wishing to sound condescending, I think that most lawyers that have entered the administration business have done so off the back of their Jersey and Guernsey private equity and real estate businesses utilising their corporate servicing experience and, for many, their reputation as hedge fund administrators is not great.”

“I think, overall, the growth in this area has probably slowed down substantially and may now be static or even retrenching,” he notes. “I do not think that the legal or accountancy firms will affect global administrators, although the major prime brokers who offer administrative services have taken some market share,” Butler concludes.

Stephen Castree at Equinoxe believes there are clear conflicts of interest between acting as custodian and then ‘independently’ verifying the existence of assets, likewise ‘independently’ valuing assets and then auditing the valuation. “The risk is that by aggregating the roles, the benefit of having an independent provider is reduced and therefore the global fund administrators would expect to see an increase in business rather than the reverse,” he notes.

Hans Hufschmid at GlobeOp agrees that greater emphasis is being placed on avoiding a conflict of interest by separating fund administration duties from the business of trading, custody or lending. “The strength and responsiveness of an administrator wholly dedicated to investing in and providing administrative services is also valued for reducing the operational risk created by concentrated counterparty exposure,” he says.

Peter Hughes at Apex believes competition is good for the end user. “Some accountancy firms are providing administration services and are auditing their own work. In a world of increasing regulation and issues such as Madoff, this should not continue and should be a red flag to fund managers and their investors,” adds Hughes.