What are the specific challenges for fund administrators dealing with Ucits III hedge funds and funds of hedge funds?

With the increase in the number of Ucits III-compliant hedge funds, fund administrators need to be aware of the specific requirements. However, because administrators dealing with these funds are in regulated jurisdictions, they should be able to cope with the added reporting obligations.

From an administration perspective, the main difference for alternative investment funds within Ucits structures is frequency of net asset value (NAV) calculation, notes Oliver Scully at Citco. “Weekly and daily NAVs are now common place and as long as the systems and checks and balances are in place the administration of Ucits products should not unduly impact administrators, even allowing for some additional reporting and regulatory requirements,” he concludes.

The compliance and regulatory oversight required by Ucits III means fund administrators have to provide additional reporting and management activities, agrees Ian Headon at Northern Trust. “This is challenging for some fund administrators if they do not have the technology to capture and report the necessary investment compliance data together with the ability to perform the statutory trustee/fiduciary role,” he points out.

As the number of Ucits III vehicles grows, fund administrators will need to dedicate even greater investment and resources to support their clients, believes Headon.

Richard Ernesti at Citi says the fundamental processes for Ucits structures should not represent a significant operational obstacle to administrators. However, he says it is crucial that administrators possess an end-to-end servicing capability in order to offer managers an efficient and cost-effective service model.

Ucits III funds require certain specific reports that need to be made on a regular basis, but most of these can be produced automatically, points out Dermot Butler at Custom House. “Once the fund has been set up on the system, the provision of appropriate Ucits III reporting should not prove to be difficult. Most Ucits III have at least two valuations per month and, in many cases, daily valuations, and that can produce stress for some administrators,” he cautions.

For most Ucits funds, success will depend on effective distribution. This means the administrator will need a robust and efficient transfer agency system, advises Butler.

Stephen Castree at Equinoxe agrees the increased reporting needs require flexibility. “The ability to have a good understanding of the requirements and service funds from the appropriate domicile is key,” he advises.

“Enabling fund clients to be Ucits Ill-compliant requires a robust, scalable, high-quality middle- and back-office infrastructure that can be costly and time consuming to develop and maintain,” says Hans Hufschmid at GlobeOp. “Significant IT and resource investment is required to upgrade in-house systems, many of which are spreadsheet based, and provide sophisticated over-the-counter (OTC) processing and risk reporting services. It is a complex and rapidly expanding territory in which few administrators have extensive experience,” he adds.

Paul Stillabower at HSBC Securities Services sees the main challenge as managing the misinformation of Ucits III hedge funds. “There is a lot of talk about ‘badging’ funds as Ucits III due to investor demand for these ‘more secure’ products. However, the actual number of Ucits III hedge funds launched is not that great, at least partially because there are a lot of very strict, potentially constraining rules that need to be adhered to when setting up a Ucits III fund,” he cautions.

SEI’s David Morrissey is seeing more managers looking to Ucits as a means of achieving broad European distribution through regulated products. “Firms need to understand the infrastructure and regulatory implications in order to successfully utilise them,” warns Morrissey. He points out that SEI has the systems and processes in place for daily processing and transparency, “so we are well positioned to take advantage of this trend”. 

Calculating a daily NAV may pose a challenge, says Deborah Yamin at State Street, although leading administrators have been providing daily NAVs for years. “The more difficult challenge is striking daily dealing NAVs and carrying out all the controls required for a dealing NAV on T+1,” she notes.

“For the more complex products and OTCs, getting all the information from prime brokers, counterparties and custodians to effectively reconcile and fully stand over a dealing day NAV will be a cultural change to the typical monthly dealing time frames of traditional hedge funds and the associated procedures and controls,” adds Yamin.

In Europe the growing Ucits brand will require some hedge funds and their service providers to build connectivity to clearing platforms such as Euroclear, EMX and All Funds, Yamin concludes.

Peter Hughes at Apex agrees there are more onerous reporting requirements but says administrators delivering these services are in regulated jurisdictions and are aware of the requirements imposed on them to deliver this reporting. “It helps to have a middle-office function so the daily reporting is automated and the right risk management data is available in a daily environment,” he adds.