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processes in order to provide the speed, control and f
lexibility needed to weatherthis new era of regulatory and
accounting compliance.
Adopting a unified, global accounting standard in US and
internationally was themandate of FASB and IASB committee working
towards convergence of UA GAAP
1and IFRS by 2014.Advisers in the process of launching new funds
are faced with the decision
regarding the set of accounting standards to follow: US GAAP or
IFRS. Since hedgefunds do not require regulatory filing, so
decision to adhere to either of the twoaccounting standards depends
on investor's requirement or investment strategyfor the fund. Also,
there is a strong possibility that hedge funds will have to
adhere
to IFRS (global accounting standard) in the near future and deal
with complexitiesinvolved during transition from US GAAP to IFRS.
Thus, the administrator will needto be competent in both US GAAP
and IFRS and have controlled processes andsystems in place to lead
a smooth conversion to IFRS.
The collapse of Bear Stearns & Lehman Brothers has forced
the hedge funds toreview its relationship with prime-brokers in a
new light.
2Hedge funds have become susceptible to re-hypothecation by
prime brokerswhich enable them to use client assets even when the
hedge fund is not borrowingor using leverage in the portfolio. Post
Lehman collapse, hedge funds have becomeaware of therisks
associated with re-hypothecated assets, if a prime brokerdeclares
bankruptcy (all the fund cash can get trapped). Thus, hedge funds
aremoving towards multi prime-brokers model to mitigate
counterparty risk. Fundadministrators have to work towards building
a technology platform that wouldact as a bridge between funds and
prime brokers with least operationalcomplexity.
(iii) Global Accounting Standard Impact on fund
administrators
(iv) Changing relationship with prime brokers
Conclusion
References:
The role of hedge fund administrator is constantly evolving
owing to the rapidgrowth in the hedge fund industry and the scope
of the product 'fundadministration' is expanding. As competition
heats up, hedge funds have opted tounload the burden of maintaining
a back office and focus more on core activities.Thus, fund
administration space has become a battle ground for many players
whowant to capitalize on this hedge fund outsourcing trend.
The hedge fund industry turmoil, owing to volatile market
conditions has madehedge fund managers biased towards
administrators providing a host of valueadded services like
enhanced valuation capabilities, risk reporting,
collateralmanagement and compliance services etc. Besides the
traditional fundadministration services, these value added services
act as product dif ferentiators
and help the administrators to gain competitive advantage in
present marketcondition and emerge as future winners.
1. Jose'R Santamaria RBC Dexia Investor Services (April 2009) -
The changing landscape of valuationservices for alternative
investments.
2. Neill Ebers (2008), Changing Relationship FT Mandate,
November 20083. Hedge Fund Review (February 2009): Global
administration round table Confronting a
challenging environment.4. PWC Advisory Services (2009): IFRS is
on the horizon Are your systems ready.5. Definition of
re-hypothecation (http://www.businessdictionary.com)
1. The US Securities and Exchange Commission (SEC) announced in
April 2007 a series of actions it intends to take relating to the
use of global accounting standards that are high
quality,comprehensive and rigorously appli ed i.e. acceptance of
IFRS globally.
2. US practice in securities trading whereby (under certain
circumstances) a broker may use securitiesin his or her possession
(but owned by a customer) as collateral to raise a loan to cover a
short position.
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