While the BVI may not boast the larger fund administrators, the industry is holdings its own in a competitive market.

The British Virgin Islands (BVI) hosts a vibrant community of small, independent hedge fund administrators. The sector is distinctly boutique and assets under administration are small by global standards.

The largest administrator in the territory services only around $5 billion in hedge fund assets. Rather than chasing scale, administrators in the BVI say their focus is on providing a high level of client service and building partnerships with start-up hedge funds.

The big-name, multi-billion dollar administrators are not present in the BVI although the local authorities would like to see them in the jurisdiction. Citco consolidated its Caribbean offshore fund administration and outsourcing business in Curacao several years ago while retaining a large trust business in the BVI.

Fortis is currently in the process of closing down its fund administration business in the jurisdiction. In 2006 the Dutch bank acquired Hedge Fund Services (HFS), the largest administrator in the BVI at the time (although rival Folio Group disputes this assertion) with $2 billion in assets under administration (AUA).

The deal was trumpeted as a major endorsement of the BVI fund sector and presented as a cornerstone of Fortis’s plans to expand in the Americas. That was before the troubled acquisition of ABN AMRO and the onset of the credit crunch which led to the nationalisation of parts of the bank.

Fortis is understood to have transitioned its biggest BVI clients to its Cayman Islands operation and plans to disband its local office at the end of April 2009.

“There is no systemic reason why the large administrators are not in the jurisdiction. And it is not a reflection on the BVI as a financial centre. It is the result of a series of coincidences and some bad management decisions,” says Peter O’Connell, managing director of Conifer Fund Services in the BVI.

The absence of a large, internationally recognised administrator in the BVI means much of the big-ticket work flows out of the jurisdiction. The largest BVI-based hedge funds are administered onshore or in locations like the Cayman Islands and Ireland. Local industry experts estimate that less than 10% of the assets under management (AUM) in BVI-domiciled funds are administered in the jurisdiction.

Looking for big players
It is a scenario the authorities would like to see change. “It is our hope that one of the big administrators will establish a long-term presence in the BVI,” says Sherri Ortiz, chief operations officer of the BVI International Financial Centre (IFC).

Ortiz admits the chances of that happening in the current market climate are faint. The IFC will make its case to international fund administrators once the Securities and Investment Business Act is enacted, she says.

“The new legislation will provide a platform for us to go and talk to the large administration companies about setting up in the BVI. We are also promoting the jurisdiction as a domicile for Latin American funds. The success we have in attracting business from that region could raise the profile of the BVI among fund administrators,” Ortiz says.

David Sims, managing director of Beacon Fund Advisors, does not expect a big-name administrator to set up in the BVI in the immediate future. “The fund administration business is consolidating. There needs to be a catalyst to establish an office here. At this point in time, there is nothing on the table that would prompt a large administrator to open up in the BVI,” he says.

While they may have departed, Citco and Fortis have left a legacy in the jurisdiction. Many locals gained valuable experience at these companies and the administrators currently active in the jurisdiction have benefited from this increase in skill levels. Some of the senior staff at Citco and Fortis established their own independent administration businesses in the territory.

Sims was formerly a director at Citco before setting up Beacon in 1997. The company specialises in providing fund administration and management services to smaller hedge funds. Beacon currently services around $750 million in AUA across 40 funds. Investors in these funds are typically high net worth individuals, although Sims believes institutional investors also have exposure to Beacon’s clients through intermediaries like Citco.

Conifer Fund Services was established in 2007 as a direct consequence of Fortis’s acquisition of HFS. Its parent company, San Francisco, California-headquartered Conifer Securities, had been providing offshore fund administration to its international clients through a strategic partnership with HFS. Following the acquisition by Fortis, Conifer launched its own fund administration capability in the jurisdiction. O’Connell, previously at HFS, moved to Conifer with two colleagues after a short stint at Fortis to launch the BVI office.

Conifer Securities’ services for alternative investment managers range from prime brokerage and middle-office outsourcing to fund registration, technology support, consulting services and office facilities. When the business was first established the concept was to offer a bundled suite of support services to start-up fund managers. The business model has evolved since then and clients are now able to pick and choose from a menu of different services, including fund administration in the BVI.

O’Connell says the link with a large onshore company makes Conifer unique in the BVI. Around half of the funds administered by the company are onshore structures. Of the remainder, 80% are Cayman-based. O’Connell says Conifer currently administers around $2 billion in hedge fund assets.

Folio Group is the largest fund administrator in the BVI in terms of AUA. Unlike Conifer its focus is mainly on servicing BVI-domiciled hedge funds. Around 80% of the funds administered by Folio are registered in the BVI, according to Daniel Cann, marketing director.

Cann says Folio has grown steadily on a diet of referral business from existing clients and local law firms since it was launched in 2001. The independent company has a focus on providing high levels of client service. Like many administrators in the BVI, Folio’s clients are smaller hedge funds that fall under the minimum asset requirements of the larger administrators. These smaller funds typically have high net worth individuals and family offices, rather than institutional investors.

“These types of funds have been a good source of business for us. They may be small when we start working with them, but some have grown their AUM to significant levels over the years. These funds have stayed with us because of the level of service we provide,” says Cann.

Folio had around $6 billion in AUA at the end of the third quarter of 2008. Cann admits the performance and redemption issues that have plagued the hedge fund industry over the past six months have hit the company. AUA has fallen by 20%–25% since 2008.

The fall in asset values has had an inevitable knock-on impact on fee revenues. Folio is tightening its belt accordingly but is keen to ensure that client service and long-term business development efforts are not compromised.

“There are a limited amount of variable costs that we can eliminate without compromising the business. We are still getting out and marketing our services, and we still employ the same number of people as we did before the downturn,” Cann says.

Importantly, Folio is maintaining its technology spend despite the downturn. The company uses PFS Paxus for fund accounting (the system is used by Custom House and Credit Suisse among others) and Bloomberg for pricing. “Technology is a necessity if you want to be taken seriously in this business,” comments Cann.

Conifer’s O’Connell acknowledges the impact of the financial crisis on the fund administration business. He says AUA at Conifer have fallen since the third quarter of 2008 as existing funds have suffered losses or closed, while new business has effectively dried up.

“We have used the relative quiet of the past few months to implement internal projects aimed at improving efficiency,” says O’Connell. However, he believes the green shoots of recovery are beginning to be seen. Conifer signed a flurry of new clients in March and O’Connell is optimistic about business prospects for the rest of the year.

“Hedge fund managers that were sitting on the sidelines are starting to move into the market and are launching new products. I’m expecting to see more new fund launches in the second half of the year,” he says.

O’Connell says these launches will encompass a wide range of strategies. Conifer has been in discussions with one promoter who is preparing to launch a fund to invest in the complex and illiquid mortgage-backed securities market.

The company is also seeing a lot of interest in launching very liquid hedge funds. “We have spoken with some managers that have very interesting ideas on how to provide more liquidity,” O’Connell says. He believes Conifer will be providing weekly net asset value (NAV) for a number of funds before the end of the year.

Positive trend
The trend towards third-party administration and greater transparency is a positive one, according to O’Connell. He sees an expanded role for administrators in providing investors with independent exposure and attribution reports. “There is an opportunity for administrators to re-tool with new technology and facilitate the higher levels of transparency demanded by investors,” he says.

Conifer is in the process of launching a web-based reporting service for its clients and their investors to cater to the demand for greater transparency. The company can also provide multi-prime reporting for small and mid-sized hedge funds looking to diversify their counterparty exposure for the first time.

Calum McKenzie, corporate director at Folio Group, is optimistic about prospects for the business in the long term. “Folio has always been a profitable business and we believe it remains a profitable proposition in the long term,” he says.

He has been encouraged by the trickle of new fund launches in the BVI since the beginning of the year. Folio was selected to provide administration services for two hedge funds launched at the end of March and has been confirmed as the administrator for two additional hedge funds that are expected to launch at the end of May.

These funds are pursuing managed futures and equity long/short strategies, Cann reveals. He says the products being launched in the current market have some common characteristics. “They are highly liquid and transparent and follow best practices in terms of administration and risk management,” he explains.

Folio is also seeing demand for higher levels of transparency and more-frequent reporting. “We are currently providing weekly NAVs for a handful of clients and have received enquiries about daily valuation,” Cann says.

The hedge fund administration community in the BVI includes a diverse clutch of boutique players. Many have their own niche. Blenheim Group, for instance, specialises in administering private and professional funds with one to 25 investors and less than $30 million in AUM.

International Financial Administration Group offers a highly evolved service at a price small and mid-sized funds can afford to pay. This includes daily indicative NAV calculations – a function even the largest administrators struggle with.

A host of other administrators, including Circle Partners, Castlegate Investment Services and ATU Fund Services, part of Lichtenstein’s VP Bank, have found their own niche in the jurisdiction.

The BVI has also attracted a host of new start-up fund administrators in the past 18 months. Ogier Fund Administration and Castlegate Investment Services are among the recent entrants. Maples Finance, part of the offshore law firm Maples & Calder, is the latest administrator to begin operations in the jurisdiction.

Maples Finance established a presence in the BVI in 2004 as a regulated trust company. Last year it established Maples Finance Fund Services (BVI) and expanded its range of services to include fund administration and registrar and transfer agency services.

Maples Finance director Scott Somerville says the business was established in response to enquiries from international clients about fund administration services in the BVI. “These enquiries and our recognition of the present and potential growth of the BVI as a significant jurisdiction for offshore investment funds made us decide to expand the services offered by Maples Finance in the BVI to include fund administration,” says Somerville. The Maples Finance office in the BVI is fully staffed and operational and is already servicing clients, he says.

With approximately $30 billion in AUA globally, Maples Finance is the largest administrator operating in the BVI.

ACE Fund Services is another recent addition. It is part of Panama-headquartered legal and professional services group Patton, Moreno & Asvat. Its parent company has been active in the BVI for many years. ACE was launched in July 2008 as an added-value service for existing clients with fund structures in the BVI, according to Mara Alido Spencer, head of ACE Fund Services.

She says the Patton group is committed to the BVI. “We’re very optimistic about the BVI as an international fund centre. The intention is to grow the fund services business in this jurisdiction. There is a lot of business in the pipeline,” she says.

ACE Fund Services has not been severely impacted by the global market downturn. The focus over the past eight months has been on establishing the office and implementing the company’s proprietary fund administration system. The company has also been working with existing clients of the Patton group to get their fund structures up and running.

“A lot of existing administrators have been forced to reconsider their operating models and cost structures following the steep declines in AUA and the slowdown in new fund launches. We have started with a clean slate and taken the current environment into account in the way we have built the business,” says Spencer.

ACE is targeting hedge fund start-ups and incubator funds seeking a cost-efficient independent administrator, Spencer says. She believes the second half of 2009 will see a rash of new fund launches. “A lot of promoters and managers have taken a ‘wait and see’ approach in recent months. I think that mentality is starting to change. Managers are ready to go back into the market,” she says.

The new breed of hedge funds launched in the coming months will be more sophisticated, Spencer adds. “They are being designed to be more resilient in the event of a financial crisis.” These funds are also more likely to appoint independent administrators to verify the value of assets, due in part to pressure from investors, she concludes.