Check back each month to read the latest article related to hedge fund administration, long term trends, basic fundamental situations or some other topical study written by Dermot Butler of Custom House Global Fund Services Ltd.
- Commentary on Euro Crisis
- Is the Future the Past?
It is at this time of the year that correspondents like me, who have the temerity to express their opinions in public, are asked to express those opinions on two topics, which are usually along the lines of:
1. What was the most significant event that affected the financial markets in the current/past year?; and
2. Are you optimistic/pessimistic for next year and/or what is your major concern for next year?
On reflection, I think that, with regard to 2011 and 2012, the same answer applies to both questions. Click here for full article
- CFTC Position Limits — Very Limiting
This month I was proposing to comment on the CFTC Position Limits announcement of 18th October last. However having read Charlie Crow's (Crow Associates) very clear Client Alert, I have the liberty of quoting his paper in total - CFTC Position Limits a Game Changer... Click here for full article
- Fund Directors — A Supply and Demand Equation
Since the 2007-2009 debacle and particularly since the Madoff scandal, there has been a growing focus, by institutional investors in hedge funds, on corporate governance. This focus has concentrated on the role of funds' Directors and this movement to introduce or strengthen corporate governance in the context of directors of funds, has been endorsed by the recent launch of "The NED" - a publication with the sole objective of discussing the role and responsibility of "Non-Executive Fund Directors". Before proceeding, I would like to make a couple of small, but nevertheless, important points . . . Click here for full article
- Whatever Happened to Cost Benefit Analysis?
I have previously discussed some of the pitfalls of the Dodd-Frank Act. But aside from this, there have been thousands of words written concerning the excessive cost that will be imposed upon the industry in complying with all of the regulations introduced globally post-2008. Over and above the costs of putting in systems and training staff to handle these compliance issues, there will be huge legal costs. Click here for full article
- Shadow Accounting — Another Recycled Product
Since the 2007/2009 financial meltdown (the "Crisis"), we have seen a lot of activity by investors of a certain size demanding to invest in the hedge fund markets through managed accounts. What is puzzling is that, by reading the hedge fund media, one would think that the "managed account" was a new phenomenon - even, for some, the Holy Grail. However, it is neither new, nor the Holy Grail. Of course, properly structured managed accounts have some serious advantages over funds, not the least being increased liquidity and transparency, providing those who are offered transparency actually understand what they are looking at. As for being a new product designed to protect investors from the horrors of a market collapse - this is poppycock.
It is a fact that the managed account has been an investment vehicle of choice for investors in futures and commodities for several decades - even before the first commodity fund was launched on an unsuspecting public, which was, if I recall correctly, either the Armac or the Count Fund, which were Bermuda domiciled funds launched probably more than 40 years ago. What I am getting at is that almost all commodity managers or CTAs (a late 1970's acronym) sought out managed account clients from day one. It was only when they had attracted so many accounts that it became a problem servicing them - not only in terms of allocation of trades, but also in maintaining the books and records - that the CTAs set up a fund and directed their clients into the fund's welcoming arms. In the US, the fund was structured as a limited partnership (LP), but the principle was the same as in the offshore market. Click here for full article
- If It Works in Houston, It'll Work in Singapore
There's a lot to be said about getting a fund administration location correct. Get it wrong and you can damage client relationships along with your reputation. Get it right, and growth opportunities can blossom.
So when I read last month that the Monetary Authority of Singapore (MAS) was planning to strengthen the Lion City's fund administration business, I rather welcomed it, not least because we ourselves operate there.
Far from being a threat to competition, I think having a concentration of administrators will actually benefit us. It reminds me of Houston, Texas. Go to get your car fixed and you literally drive to the equivalent of Garage City where multiple car garages all compete for business. They all do well. I think the same will happen in Singapore with global administrators.
As long as MAS regulate sensibly I've got no problem with it. If they want an oversight, visit administrators' offices to check they're valuing things the way they say they're valuing them, then that's fine. It strengthens the hand of the administrator: not only are the funds regulated but so are we.
When we merged with Equity Trust we had three offices. Costs in Dublin were skyrocketing so we had to decide: Where can we set up that's going to give us a decent global footprint?
In the end I chose two locations: Chicago and Singapore. Click here for full article
- QIF — The Original IF Fund
The Irish "IF" Fund is the "QIF", pronounced "quiff" and meaning the Qualifying Investor Fund. It ranks alongside the Luxembourg "SIF" Specialised Investor Fund) and the Maltese "PIF" (Professional Investor Fund), although, as the oldest IF Fund of the three, the QIF can perhaps claim to be the senior IF Fund.
Like the other IF Funds, the QIF is regulated by its national regulatory authority - in this case, the Central Bank of Ireland. This strong level of regulation is why I have contended and continue to contend that all the IF Funds actually meet the objectives of those managers and investors who, post-Madoff, are seeking "regulated" funds and have, for the most part, targeted UCITS. Although regulated, UCITS are very much more expensive to establish and to operate than the IF Funds. Click here for full article
- Considerations for Choosing the Right Fund Administrator
Dermot Butler, Chairman of Custom House Global Fund Services, talks about the many factors a new fund manager needs to take into account when starting a fund and how choosing the right fund administrator can help. Click here for full article
- Why the Maltese PIF? Is it a more attractive hedge fund vehicle than the ubiquitous UCITS fund?
In the context of "offshore" or what is today better described as "non-domestic" fund and financial services centres in Europe, Malta is a relatively recent entrant to the market. For many years, Luxembourg ruled this particular roost, particularly in the context of money market and long-only SICAVs (Euro-speak for a mutual fund). And it was the former that attracted the now famous (or today, infamous) Belgian dentist, who slipped across the border from Belgium into Luxembourg and made his cash (and tax efficient) deposit into a Luxembourg money market fund. Why the Belgian dentist was picked on, instead of a German GP or French pharmacist, I will never know. Be that as it may, Luxembourg was, for many years, fairly smug (and justifiably so) in its lead position and tended to ignore Dublin, in the late 80s and early 90s, as the upstart centre that was promoting both the listed fund and (on the Irish Stock Exchange) the hedge fund. It was about five years ago that Luxembourg woke up to Dublin's lead in the hedge fund area and introduced regulations, including the SIF, or Specialised Investment Fund. The "SIF", which was ideally suited for the hedge fund and other alternative funds, including Real Estate, Private Equity and private funds for Family Offices. Since the introduction of the SIF, over a thousand SIFs have been launched, with probably close to 50% being existing funds that were reorganised and the balance being a new product. Ireland has been promoting its own sophisticated or professional investor fund - the "QIF" (Qualifying Investor Fund) - and with some success, and then, as I say, Malta entered the market and introduced its PIF, or "Professional Investor Fund". There is, in all honesty, little difference between the SIF, QIF and PIF, except perhaps cost. They are all products of EU member states and, therefore, subject to both domestic and EU regulation, which, in itself, in a market environment, is an attraction. Click here for full article
- Luxembourg's Growth as a Hedge Fund Centre and the Contribution of the SIF
Luxembourg has dominated the European "Offshore" (i.e. non-domestic ) fund market for decades - indeed, they were the first 'off the block', so to speak when the original UCITs Fund Directive was introduced by the EU (or whatever its predecessor was) in 1986. The Channel Islands and the Isle of Man, who comprised the main European competitor offshore fund jurisdictions at that time, concentrated primarily on the English speaking markets, which consisted of targeting UK investors and investors from the main existing, or 'ex' British Commonwealth territories, particularly those in South and Southern Africa, as well as, for example, Australia and Hong Kong. Click here for full article
- The AIFM (Alternative Investment Fund Managers) Directive - A Bit of a Damp Squib for Non-EU Managers
Last month, after more than 18 months of negotiation, the European Council of Ministers, the European Parliament and the Commission, finally agreed a text for the AIFM Directive, the first draft ("Draft") of which was issued in April 2009. That Draft, which was, frankly, a ridiculous and ill-thought out document, demonstrated scant awareness of the functions and contributions of the various alternative investment markets and their participants that it was attacking. I use the word "attacking" advisedly, because one very clear aspect of the Draft was the political motivation behind it.
One other thing that was clear from the outset was that, if the Directive was ever to become law, it would only do so after various substantial modifications and that is what happened during those 18 months up to last November. Of course, I may have misread the skill of the sponsors of the Directive (primarily the French and the Germans supported by the Danes), who may have submitted a Draft that was so far "over the top" that even quite extensive modification left a Directive that would meet many of their more realistic objectives intact.
The original Draft proposed had several highly restrictive components, but I think the two which were the most potentially damaging were: Click here for full article
- Currency Trading - The Speculator's Dream - or an Acceptable Hedge Fund Strategy?
I was asked the other day whether I thought that currencies were an acceptable asset class for hedge funds, the implication, presumably, being that otherwise they were just the speculator's dream. The following comments reflect my own personal opinions.
To address the last point first, I would suggest that any liquid market with volatility is a speculator's dream and the currency markets have, and always have had, those two characteristics in abundance. Of course, ignoring speculation for speculation's sake, currencies play an important part in almost any investment made by a global investor. But I will come to that later. Click here for full article
- UCITS 'Not a Cure-all' for Hedge Fund Market
The flavour of the month or the year is undoubtedly UCITS Funds for Hedge Funds, which have been rechristened as "NEWCITS".
I have been much cheered in the past couple of months or so by the friendly demeanour of the Irish Legal Fraternity. This has been because of the dramatic increase of instructions received by these lawyers to establish UCITS Funds from Hedge Fund Managers around the world, particularly American. There are reports that UCITS are much in demand in Asia and around the Middle East and that things have changed - apparently.
I say 'apparently' because I remain to be convinced that UCITS are the new panacea for the Hedge Fund market and not just hype. It appears from the comments in the media and various discussions at assorted Hedge Fund conferences around the globe, that the demand for UCITS is a reaction to the increased desire for a regulated investment product by investors and the desire to get a foothold in Europe, prior to the enactment of the EU AIFM Directive, which has been a case study in legislative ineptitude. Click here for full article
- The New Paradigm - SAS 70 Reports and Alternative Investment Managers
Introduction by Dermot S. L. Butler, Chairman, Custom House Global Fund Services Limited
Except for holy men living on top of poles in Mumbai, everyone in the hedge fund industry knows that there has been a dramatic swing from the avoidance of regulations as far as legally possible ten years ago, to fully embracing regulation (albeit somewhat nervously) today.
As an industry, the members of the hedge fund community have become much more disciplined and have taken their responsibilities as far as corporate governance and risk management, including the management of the portfolio and the procedures and policies they follow in running their hedge funds, much more seriously than in the past, when a somewhat cavalier approach prevailed.
Investors have become much more proactive and, whereas, ten years ago, the amount of due diligence that was carried out on the service providers was negligible, today, the institutional investor will visit, not only the investment manager, but also the administrator and probably the custodian, to establish exactly what they do, how they do it and when. Thus, due diligence visits can be very intense, stressful and expensive, in that they soak up management time and resources. One of the ways of ameliorating this burden is for the 'investigatee' (such as ourselves, as an administrator) to undergo the full SAS 70 treatment so that we can provide the investor's due diligence team with a SAS 70 report.
Some of you will, no doubt, be wondering what a SAS 70 is - indeed, when we first considered applying for a SAS 70 in 2003, I asked several hedge fund managers whether they thought it would be useful for us to have a SAS 70 and I either got a blank look, or the more imaginative asked whether I was talking about a new model SAAB. That has changed. Whereas it used to be only service providers and, in the United States, particularly banks and custodians who underwent the SAS 70 treatment, there is an increasing activity by hedge fund managers who are seeking their own SAS 70s. Click here for full article
- Setting Up a Hedge Fund - Part 2
Successful management of a hedge fund is virtually impossible, in today's marketplace, if the hedge fund manager ("HFM") has not created a first class infrastructure, including the necessary administrative and operational support staff.
When the hedge fund industry first started in the United States, the one trader and one back office person was the common model. Gradually, the need for a more substantial back-office grew, particularly in the U.S., where the HFM also doubled as the GP of its fund, which was typically a self-administered limited partnership. At this time, the investors were the ubiquitous high net-worth ("HNW"), together with some family offices, representing the very HNW investors. As the market grew, most prime brokers established 'hedge fund hotels' - providing furnished and equipped office space for HFMs, plus some back-office support. The prime brokers also offered a "cap-intro" program, all of which was designed to attract the HFM to the prime broker for obvious avaricious reasons. Whilst this evolution was taking place, there were a few major HFMs, including some CTAs, who had broken through the US$1 billion mark and had done so by attracting institutional and endowment money from organisations such as Harvard, Yale, CALPERS, as well as Sovereign Wealth Funds, for example, in the Gulf and Singapore. Each of those institutions was run by very far-sighted investment managers.
Today, it is the institutional investors who drive the hedge fund market, post the 2007/2008 liquidity crisis and the Madoff scandal, with many of the HNW investors still recovering from the shock and the aftershocks of the crisis. With increased involvement of institutional investors has come an increased level of due diligence by those institutional investors, on both HFMs and service providers, and an increased level of service requirements in all areas, from risk management and operational transparency, at one end of the spectrum, to the quality and capability of these service providers to the HFM's fund, at the other end. It is because of the high standards of operational due diligence and investment policy due diligence that the institutional investors now bring to the market that start-up HFMs have to do a lot more if they wish to attract subscriptions from these institutions.
As explained last month, it is essential that the HFM gets his "ducks in a row", before actually establishing a hedge fund, whether that be a U.S. L.P. or an offshore fund, issuing shares. I therefore propose to give lists of boxes to be checked, so to speak, initially for the HFM prior to establishing its hedge fund and, secondly, what to do in the context of establishing that hedge fund. Click here for full article
- Setting Up a Hedge Fund - Part 1
The problem with writing about a topic such as starting up a hedge fund is that there are so many questions that have to be asked - for example, where do you want the fund to be established. The answer to these questions usually begs another question, so I am just warning you that this is going to be a long and, perhaps, convoluted paper, and indeed it will probably be spread over 2 months. This month will be more of a descriptive and discussion paper - next month will be more procedure and checklist orientated.
As mentioned above, this paper is meant to discuss and describe how to set up a hedge fund and not how to become a hedge fund manager (a "HFM"). However, you cannot do a credible job in the context of setting up a hedge fund without some reference to the HFM and its structure and organisation. Gone are the good (?) old days when a trader could leave the prop desk of a Goldman, a Morgan Stanley or Solomon and take a one-room office and start trading with one or two colleagues and spread the word that they were the new HFM on the block and "please send me your cheque". Click here for full article
- How to Select an Independent Administrator
Probably the greatest advantage that an Investment Manager can have when selecting an Administrator is an overdose of common sense, although we have recently been asked what an Administrator does by one Hedge Fund Manager (HFM) that we would have thought were extraordinarily sophisticated - well he had a total $4 billion Assets Under Management, which is, perhaps, one measure of sophistication. This shows that, while there are obviously HFMs in the market, particularly in the US who have no idea what an independent administrator does. This is not decrying the US Investment Manager. It's decrying the fact that, for so many years, a high proportion, if not the majority of US private investment funds, including hedge funds, private equity and real estate funds have been structured as partnerships and the General Partner, who is often the Investment Manager, or very closely associated with the Investment Manager, is also responsible for maintaining the books and records. As such, many of these self-administering managers have never considered what an Independent Administrator does and, therefore, have very little idea. I tried to give a very simplistic overview of what an Independent Administrator does in one of my earlier papers and I hope that the readers of this paper have a reasonably clear idea of what an Independent Administrator ("Administrator") actually does, or more to the point, what it should be able to do. Click here for full article
- Hedge Fund Administration 101 - What Does An Administrator Do?
We at Custom House were surprised to receive a call from a well established hedge fund Manager in Connecticut (circa US$4billion AUM), whose funds were self-administered and who was considering appointing an independent Administrator. For those US Managers who manage limited partnerships and who don't have an offshore fund and may not know the term Equalisation, I shall explain that. However, he was not entirely sure what an independent Administrator did and so rang up and asked us. His first question was "Do you calculate the NAV?", to which we replied, somewhat surprised "Yes". The second question was "Do you liaise with the auditors?" and, again, we replied "Yes" and went on to explain what we do as an Administrator. It has to be said that, when we put the phone down, I and my colleagues looked at each other with some incredulity as to how is it possible that a sophisticated hedge fund Manager didn't know the basic duties of an independent Administrator. Then, of course, we realised they'd never had to use an independent Administrator and, therefore, they really didn't know. It wasn't stupidity or naivety, it was just a case of "why should they know anyway?". This led us to the conclusion that, perhaps we ought to have a sort of Independent Hedge Fund Administration 101 seminar, which we did in New York last November and which was surprisingly well received by about 40 attendees. So Chapter 2 of Custom House's reports for Barclayhedge is going to be just that: Click here for full article
- The Pros and Cons of Independent vs. Self-Administration
for Hedge Funds, CTA Funds and Managed Accounts
It seems extraordinary to many, coming from a non-US background, that any fund should be self-administered. Self-administration is very definitely an American phenomenon and that is a result of historical circumstances.
In the United States, hedge funds and, for that matter, most other alternative investments, including real estate, oil and movie finance projects, have been structured as Limited Partnerships (LPs) and were self-administered and, indeed, a high proportion still are self-administered. This means that the General Partner (GP) acts, not only as the investment manager, but also the administrator of the LP. This arrangement has been in place for many years and it has to be said that the vast majority - conceivably 99.99% of these LPs - were (and still are) very well run and the GPs meet all their obligations. However, unfortunately, but inevitably, frauds have occurred and these generate juicy headlines, particularly if a hedge fund is involved.
Ironically, post-Madoff, there has been a lot of pressure laid on managers by institutional investors to convert from being self-administered to independently administered. This trend has been largely led by two Swiss banking investors who have allocated many billions into the hedge fund industry and who took this position following the Madoff scandal. It is ironic that Madoff never actually had a fund (notwithstanding that many funds appointed him as their investment manager) and, as such, Madoff would never have needed to employ an administrator. I don't intend to spend much time writing about Madoff, but I think that when the dust is settled, the investment world will have learnt two basic rules - firstly, the importance of in-depth due diligence and secondly that investors should be sceptical and begin to feel uncomfortable as soon as they begin to feel "comfortable." Due diligence is not a "one-off" thing - it is ongoing. Click here for full article