What are the main criteria you use to accept/reject a hedge fund client? What types of funds do you prefer?

Fund administrators have a myriad approach to fund selection. Gone, however, are the days when a fund could be dismissed just on the basis of a minimum assets under management (AUM). Fund administrators are keen to attract and keep clients, although most are favouring the more liquid strategies. Nevertheless, with the advancement of technology, administrators are also better equipped to service more complex and illiquid strategies.

“The most important factor to be considered when accepting or rejecting a hedge fund client,” explains Dermot Butler at Custom House, “is their reputation. Therefore, the main criterion is a clean bill of health on the various databases and sources of information that we use with regard to managers, their colleagues and their companies. It is impossible to cover every base, but this is important due diligence that needs full effort.”

Ideally, Butler likes funds to have between $100–$200 million, although it will take on smaller (and larger) funds. The strategy needs to be straightforward long/short equity using recognised international exchanges or futures, also on recognised international exchanges.

“However, those simple days have long gone and now we are lucky to get many who meet that criterion. But, providing the assets are easy, or relatively easy to value, then we are happy. Nevertheless, we would not wish to discourage the more complex funds, just because they are more complex funds,” says Butler. “We also relish both managed accounts and managed account platforms and other funds that need daily valuations, which is one of our specialties.”

Citi works across a multitude of fund structure and strategy types, says Richard Ernesti. “We are open to ‘non-standard’ strategies such as carbon credit and shipping. We are happy to discuss all potential new ventures and actively seek clients with whom we can work in partnership to create a long-lasting and commercially viable relationship for both parties,” he says.

Citco’s focus is on the alternative investment industry and “we will consider supporting any funds in this sector,” confirms Oliver Scully. “We want to partner with funds that have good growth prospects and a focus on operational excellence.”

Jonathan White at Viteos Fund Services believes most fund administrators would prefer a long/short equity fund with large AUM. He says many administrators focus solely on that sector. Viteos caters to “the more complex type” of funds that require middle-office support in the post-trade cycle, as well as the plain vanilla types, says White.

“We look to clients who have a strong business proposition and business plan and recognise our ability to grow with their business as they move into different and more esoteric strategies/asset classes,” he notes.

For Viteos, track record, pedigree of manager and selected partners such as prime brokers, fund lawyers and auditors are important considerations, as are the counterparties funds are likely to trade with.

David Morrissey confirms SEI supports all types of funds. “We know we add the most value to managers that have multiple investment products or those that require enhanced reporting and data management,” he says.

Omnium considers a number of factors when agreeing to partner with a hedge fund, says John Buckley. Before accepting a client, Omnium considers the level, relevance and quality of experience of the managers and the viability of their strategy. “This business relies heavily on organic client growth so Omnium invests in clients that are well positioned to succeed,” he says.

According to Ian Headon, Northern Trust believes it is important to work with hedge funds “who want a servicing ‘partner’ as opposed to a ‘provider’”.

“We choose to work with clients with whom we can grow, and become a trusted partner with a relationship based on trust. From a strategy and domicile perspective, we are broadly neutral as we place more emphasis on the cultural fit of our clients,” says Headon.

Legis uses an in-house formalised ‘deal team’ approach to considering whether to take on a client, before, during and after any fee proposal is produced, says Martin Tolcher. “Preferences would be for closed-end, inactive funds with few shareholders – but we do live in the real world,” he comments.

LaCrosse Global Fund Services prefers funds that believe administration is a valuable service rather than just a commodity and that the right provider will reduce operational risk and make the fund more attractive to investors, notes Stuart Feffer.

The principal criteria used by Trinity to accept or reject a hedge fund client vary. “Our philosophy at Trinity is to partner with our clients and develop long-term relationships to see them grow their business successfully. It is important that we fit in terms of culture and outlook in respect to the running of one’s business but also the industry as a whole,” says John McCann.

“We would look at the quality of the manager in terms of background, experience, expertise, reputation, etc. Then we will look at the strategy that they are trading to ensure it is something that we are comfortable with in terms of trade processing, pricing settlement and so on. Then we will look at the proposed fund structure to ensure that it is line with industry standards and best practices, in regard to its constituent parts. Lastly we will look at the seed capital of the product and more importantly their objectives for asset raising and their track record in relation to same,” explains McCann.

Kleinwort Benson looks at track record, integrity and solvency of funds, says Joseph Truelove. “We have very robust due diligence processes and make no apology for our very thorough approach. Our ideal client would be a London-listed closed-end fund with a blue-chip manager, monthly valuations and an independent board of directors and high standards of corporate governance,” he notes. “We also service open-end funds of hedge funds and prime broker funds as both administrator and custodian.”

“In the current market we actually have the time and resources in our client take-on team to assist new promoters to launch some quite exciting new funds. We have recently done this in respect of a new promoter, Emotional Assets Management and Research,” Truelove says.

GlobeOp is recognised for its ability to support large funds, complex strategies, over-the-counter (OTC) derivatives and bank debt, confirms Hans Hufschmid. “As a full-service administrator, we support a range of smaller funds and long/short equity strategies as all now require independent valuation, integrated risk reporting and a robust technology platform,” he concludes.

The minimum criteria for Butterfield Fulcrum are a “background of the investment manager (pedigree and experience of the individuals that will be running the fund can be a good indication of how successful the fund will be), style, strategy and operational requirements of the fund (do we have experience servicing funds of a similar strategy, can we satisfy the client’s needs?) and expected asset size of the fund in both the short and long term (will this be a profitable relationship?),” explains Akshaya Bhargava.

BNY Mellon looks for managers who would “like us to be part of their core infrastructure, regardless of portfolio strategy, and where we can make a significant difference to their operational efficiency across multiple activities, including cash management, foreign exchange hedging, OTC margin management, counterparty risk as well as core fund accounting and transfer agency services,” explains David Aldrich.

A thorough due diligence, with the primary check being the regulated status of the client, is at the heart of selection for Bank of Ireland Securities Services. “If the prospective client is regulated in a recognised jurisdiction then we will look at the client’s history, people, business plan and/or existing products.

“We have no preference for any particular fund type as we have experience in administering all fund types,” says Liam McNiffe.

“We don’t like turning away clients,” admits Peter Hughes at Apex Fund Services. “We have developed our infrastructure so that we can service any fund strategy of any size in any domicile globally. We have due diligence checks to pass but beyond this we want to be a service provider that can be a one-stop shop for our clients where we can service all their products no matter where they are domiciled, locally in their time zone and preferably in their city,” he confirms.

“We don’t really have a preference for types of funds,” he adds, “but we will go out of our way to find fund of fund clients, not because we prefer them, but because they fit in well with our business model and we service them well.”

Equinoxe Alternative Investment Services works with clients “who are seeking a long-term relationship as well as those who understand the value that an administrator adds and the risk taken in the selection process,” explains Stephen Castree. “We provide a consultative approach to our clients performing a needs analysis with them prior to proposing any solution. This has often turned into a consulting arrangement to consider structures, technology platforms and even middle-office and back-office structuring,” he adds.