There was a time when heightened scrutiny was placed over how pooled vehicles like hedge funds managed investments. While these funds are not tightly regulated like commercial banks, the industry has incorporated numerous practices to instill faith among their investors. A hedge fund administrator's role has been one of the positive developments that have ushered in greater transparency. The hedge fund administrator acts as an independent agent that manages the fund manager's middle and back offices and serves as another pair of eyes looking over a fund manager's activities.
While the administrator performs a wide gamut of functions, this article will focus on how it plays a vital role in safeguarding investors' money.
Overseeing the fund’s bank account
One important task assigned to the hedge fund administrator is to oversee the bank account of the fund. There are generally no credit cards or cheques linked to such a bank account, and this ensures that any amount spent by the manager needs to be verified by the administrator first. The funds generally only wire transfer under the supervision and approval of the administrator. Since these administrators are also involved in determining the NAV and performing a valuation of underlying assets, any discrepancies in the movement of funds can be captured by the administrator. The reporting and reconciliation process they perform is another check that could deter fund managers from siphoning off funds for their personal use.
Independent third-party administrator
Since the sub-prime crisis[1], there has been a lot of scrutiny on the hedge fund industry and how the funds had been used without taking into account the investors' risk profile. While there has been an increase in the regulatory norms governing these funds, most hedge funds have employed an independent third-party administrator to oversee mid and back-office activities. These capabilities improve the internal controls and keep a check on the fund manager's activities. These administrators have additional responsibilities of preparing reports sent out to regulators and involve scrutiny that could put the third party under the radar of regulators. It is expected that sufficient due diligence is carried out while executing such functions and the administrator's independence is of utmost importance.
Additional tasks assigned to the administrator
The role of hedge fund administrators has expanded and is not limited to operational tasks like reporting. The administrators also review the Anti Money Laundering policies and ensure that the funds are not routed to channels that do not meet the corpus' investment objective. The administrators are also able to gauge whether there is a conflict of interest between the fund manager and the underlying investment. At times an investor could be reluctant to approach the hedge fund administrator for information. It is always advisable that these investors seek an independent opinion by contacting[2] the hedge fund administrator directly to verify the information provided directly by the fund. Any discrepancy in the data can be brought to light, and this is another way that the interests of the client are safeguarded. Keeping track of one's investment through the administrator is a good practice that would keep the fund managers on their toes and restrict them from channelizing the funds for personal gains.
The active participation of hedge fund administrators is genuinely a step towards improving internal controls. When corporate governance is of utmost importance, protecting investor capital is essential for the growth of the industry.