Hedge Fund Administration Outsourcing Trend

The message is clear, those funds which have survived this crisis or are starting up must add more institutional risk controls and best practices. Working with an independent administration firm is nothing new within the industry - many have been using them for years, the change is that now smaller funds are being asked to use administration firms by their investors, boards of advisers and service providers.

Large firms which have been performing the hedge fund administration function in-house are now re-thinking this. Small firms who attempted to perform this in-house to save money are now looking at the same decision.

With the events of last year in the credit markets and the Madoff scandal sounding another alarm bell, hedge funds are turning to independent fund administrators to validate the net asset value of their funds and calm investors.

Yesterday, Millennium Management LLC, a global multi-strategy investment management firm with over $13 billion in assets under management, said it outsourced fund administration to GlobeOp Financial Services. GlobeOp is an independent financial technology specialist that provides integrated middle and back-office, administration and reporting services to hedge funds and asset management firms.

Previously, Millennium did the fund administration itself. But there is pressure from investors to pick independent fund administrators. Given what's happened last year and given the Madoff situation, you can't be careful enough. You want someone else to trust and verify, noting that the fund administrator must verify all the cash positions, trading positions and make sure the fund pricing is correct. Statements go out monthly to investors but the work of reconciliations and pricing goes on daily.

The independent fund administrator trend has been evolving for a while but has been pushed hard now by investors. Investors are asking for an independent fund administrator for every hedge fund they make an investment in.