Hedge fund administrators see the move to Ucits hedge funds are challenging but fund aministrators believe expertise with complex strategies and valuations and daily processing will win more business.

A fund administrator is a key service provider for any hedge fund. The same applies for a Ucits hedge fund product.

But administering a Ucits hedge fund throws up challenges and questions for managers and admin-istrators.

Fund administrators believe there will be a continued stream of Ucits hedge fund launches. That means fund administration platforms are likely to undergo a change in order to remain competitive.

Once a manager has decided to replicate or move his fund into a Ucits structure the administrator’s work begins. The major difference between administering a hedge fund and administering a Ucits fund is the more frequent valuation and redemption cycle mandated by the Ucits regulation.

While managers must become used to fortnightly or more frequent valuations, a fund administrator working with a Ucits fund has to be able to support daily valuation. This requires appropriate systems and technology.

“You need to have daily fund pricing systems and all these systems have to be robust so technology is key for this notes Kavitha Ramachandran, senior relationship manager for Maitland Fund Services.

Ramachandran says the technology required to administer a Ucits fund can be challenging for administrators who do not have the technology and are not geared to daily or weekly net asset valuation (NAV) calculations.

“Straight-through processing needs to be established. That means investing in a good robust system. There would be costs involved if you’re going into Ucits for the first time,” Ramachandran adds.

Apex Fund Services’ Luxembourg head Christophe Lentschat says administering a Ucits fund involves a lot more data management than an offshore hedge fund because of the valuation, value at risk (VaR) calculation and reporting requirements.

“It involves higher costs. That’s definite,” Lentschat says.

Ian Headon, product manager for alternatives at Northern Trust in Ireland agrees that staffing is important for companies administering Ucits-compliant hedge funds. More client-facing employees are needed to work with managers.

Managers also need to be educated about the different terminology and duties of service providers in a Ucits fund. Instead of a prime broker, a depositary and trustee must be appointed. In practice the depositary is generally a custodian and the trustee the administrator and the two roles are often combined and provided by the same company.

The extra work required when administering a Ucits fund includes considerable reporting on areas including investment holdings and risk. Marc Wenda, key account manager for alternative investments at European Fund Administration in Luxembourg, says in practice much of the reporting work is legally intended to be carried out by the fund’s depositary. In practice that job falls to the fund administrator.

Short complications
“You need to follow the compliance rules and you need to report the potential breaches as well as the risk aspects. That’s something that in a plain vanilla, long-only fund is rather easy,” Wenda says. “As soon as you start playing with short positions and you need to calculate the investment policy rules for that, it’s a little more difficult.”

He says hedge fund strategies in a Ucits format bring other challenges with them and systems and calculation routines get more complicated the more complex the fund.

“That’s probably an important challenge that administrators face, generally speaking. Sophisticated Ucits automatically imply VaR-based risk reporting,” adds Wenda.

He says administrators coming from a traditional Ucits environment rather than a hedge fund environment do not typically have the systems in place to calculate VaR. That has given rise to an industry providing models to do so.

Lentschat adds that administrators need “very good” securities reference databases to meet compliance requirements. He says this requires a larger compliance function in-house or a partnership with a third-party provider. “Even if you do go with a partnership you have to provide the partner with the right data,” notes Lentschat.

Wenda says the more frequent valuation and trade cycle involved in Ucits funds requires administrators to work faster and to carry out trade processing on a continuous basis. “You need to have your exact portfolio in place so you can send the portfolio to your risk analysis provider,” he adds.

The increase in Ucits-compliant hedge funds also means administrators working with these managers need systems in place to service derivatives that are not used in a long-only Ucits.

“We have put significant resources into building experience and technical capabilities around the servicing of complex derivatives,” says Gavin Nangle, head of business development at State Street in Ireland.

Olivier Laurent, director of alternative investments at RBC Dexia, also points to the need for the administrator to process over-the-counter (OTC) derivatives.

“What we have invested in at RBC Dexia is a specific system for managing OTC derivatives and the ability to provide the full suite of services,” Laurent says.

He says the counterparty risk limits imposed by the Ucits legislation of 10% of net asset value (NAV) means collateral management is important for a Ucits fund. This gives opportunities for custodians to offer collateral management services.

Guiding touch
Risk management is also a crucial part of running a Ucits  fund. Administrators are finding they need to hold hedge fund managers’ hands to ensure that they  are handling risk monitoring, capital adequacy and corporate governance correctly.

“A manager needs to deliver to the regulator a risk management process which clearly documents the way in which that manager will monitor risk across the business,” says Nangle.

While a Ucits fund might seem more attractive in many ways, Headon says there is extra work involved that is not part of running an offshore fund. The key question becomes whether investors are willing to pay for the extra protection they get in a Ucits fund.

“In some ways the Ucits fund is easier to run and administer. On the flip side there’s an extra overhead in terms of reporting and extra data management,” Headon says.

Opinions are split over how easy it is to break into administering Ucits-compliant hedge funds. Administrators fall into two groups: those who have historically worked with offshore hedge funds and those who have a background of working within a regulated environment.

Wenda believes it is simpler to break into the hedge fund market for the first time from a regulated background. “If you’re an administrator that’s used to the regulatory framework it’s rather easy because the additional layer of regulatory reporting is already in place. You need to adjust it and it’s certainly a challenge to adjust to the more complex portfolios but it’s a minor adjustment compared to an administrator that wouldn’t be used to the regulatory framework,” he believes.

Others disagree. Lentschat thinks the customised approach offered by hedge fund administrators is something managers will still look for when seeking a service provider for a Ucits fund.

“You probably keep the same corporate culture and that’s best for the actual manager,” Lentschat says.

Maitland’s Ramachandran says traditional Ucits administrators do “struggle” with Ucits hedge funds as they are set up for “churning out” valuations on a daily basis but find the complexity of a hedge fund strategy more challenging.

For larger administrators like State Street or Northern Trust, the move to Ucits by hedge fund managers opens up doors to new clients. Nangle says Ucits is the “bread and butter” of State Street’s Irish business.

Combined with the company’s knowledge of working with offshore hedge funds, he believes there have been few challenges for State Street in attracting business from hedge fund managers venturing into Ucits.

Headon thinks Northern Trust’s experience in working with both hedge funds domiciled offshore and Ucits managers helps attract business in Ucits-compliant hedge funds. He thinks the landscape
for fund administration will continue to be “very competitive” across the board.

Overall administrators think their experience in servicing both traditional Ucits and the complex offshore hedge funds will help them capture business as the Ucits-compliant hedge fund universe expands. As Ucits regulation continues to be refined and improved even more possibilities may open up for Ucits hedge funds and few doubt they will fizzle out like the 130/30 structures.

Resources and effort spent now on building the necessary systems and training staff will undoubtedly pay off in the months and years to come.