Risk vs. CostFinding the right balance for hedge fund administration

What we'll discuss

AGENDA

1. Cost vs. risk: Finding the right balance for your fund2. Taking a fresh look at operations3. What functions should my fund shadow?4. How do I choose the right outside administrator?5. Last words

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The current environment

INTRODUCTION

Opportunity• Total AUM already higher than 2007 levels• Many new smaller funds launching, particularly with AUM >$100 million

Challenges• Managers under pressure to cut fees• Compliance and regulatory costs are high— could rise by as much as 20% over next

3 years

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Cost vs. Risk

1. MANAGING COSTS

How can my fund best meet regulatory requirements without overspending?

a) Engage a third-party administrator

b) Use in house resources c) A mix of both

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“Fund managers who adopt a full in-house shadow approach often find that

having a dedicated team under their roof helps to align fund operations and portfolio management. The downside is

scalability; there is a fixed cost associated with this approach that may be problematic in periods of declining

assets.”

- Kristin Castellanos Global Head of Product Management

Deutsche Bank Fund Services

“Large multibillion-dollar hedge funds often have both an outside administrator and a

full in-house shadow function that completely duplicates the outside

administrator’s work. Although much costlier, the resulting risk reduction means this is a trade-off they are willing to make.”

- - Michael Patanella- National Asset Management

Sector Leader Grant Thornton

1. MANAGING COSTS

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What should you look for in an administrator?• Flexible technology platform for ease

of data analysis• Bundled services, such as regulatory

reporting and/or depositary services. • Consolidated technology platform for

repurposing data at a lesser cost

“Leveraging a third-party administrator can help emerging funds achieve

economies of scale. At the same time, third-party administrators can improve the manager’s ability to set themselves apart in an environment of stringent investor

and regulatory due diligence requirements.”

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- - Fred Jacobs- Managing Director of Global

Business Development for Alternative Investments

SS&C GlobeOp

1. MANAGING COSTS

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Taking a fresh look at operations

To guide the evaluation process, consider the following areas:• Administrative costs • Administrative data • Outsourcing agreements • Deadlines • Mix of service offerings • Data access • Vendor qualifications

2. OPERATIONS

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2. OPERATIONS

“Developing a cost-efficient model means determining what to keep in-house, what to outsource and what to shadow. Finding the right mix for your fund reflects the needs and preferences of your leadership team, your investors and regulators — in the end, investors and regulators will examine whether the fund is maintaining the right amount of oversight to keep risks at a manageable level.”

- Michael Patanella, National Asset Management Sector Leader, Grant Thornton

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What functions should I shadow?

3. SHADOWING

Every fund is different, but these should take precedence: • Subscriptions and redemptions• Asset valuations• Regulatory compliance• Cash management• Risk management vendor oversight• Collateral and margin management• Foreign exchange hedging• Portfolio rebalancing• Reporting for profit and loss, position and risk reporting • Internal analytics

“A good way to think about what to shadow is by asking

yourself, ‘What is most important to my investors?’”

- Peter SanchezCEO, Northern Trust Hedge

Fund Services

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Choosing the right administratorAdministrative cost model x high priority areas = best fit

“The first step is getting referrals from other managers and auditors to create an initial list of 3-5 strong possible matches. Next, set up an initial meeting to get a sense of the administrator’s approach, and narrow the focus to two. The final decision revolves around three key external factors: (1) the amount of technology and staff the manager has in-house and how the administrator can supplement it, (2) the type of investor the fund is seeking to attract as it grows, and (3) the complexity of the fund and the ability to manage this complexity in-house.”

- Fred Jacobs, Managing Director of Global Business Development for Alternative Investments,SS&C GlobeOp

4. SELECTION

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Choosing the right administrator

Consider these factors:

• What tasks will you outsource? • What capabilities work best for your fund?• How do they stack up to their peers?• What technology are they using?• How do they communicate?• What are the particular needs of your fund?

4. SELECTION

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4. SELECTION

“When your fund starts to grow, that is when you bring those close-to-alpha processes, such as portfolio rebalancing and rebate optimization, back in-house. A mature fund needs an administrator with strong data aggregation and data management capabilities. So it is all about the life cycle of the fund"

- Peter Sanchez, CEO of Northern Trust Hedge Fund Services

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Last wordsBalancing risk & cost

• It's a living proposition – examine risk appetite regularly to ensure that administration and costs remain at an acceptable level.

• Investors need access, transparency and demonstrated risk levels that provide a comfort level that keeps their investment with you.

• Re-evaluate administrator structure often and remain flexible to your growth, your customers, and new regulation.

5. IN CLOSING

“Remember that you are building a long-term

relationship. Look for a comprehensive service offering and a flexible technology platform.”

- Kristin Castellanos Global Head of Product Management

Deutsche Bank Fund Services

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CONTACT US

Michael PatanellaPartner, National Asset Management Industry LeaderT 212.624.5258E Michael.Patanella@us.gt.com

GRANT THORNTON NATIONAL ASSET MANAGEMENT LEADER

The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory membership organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity. In the United States, visit Grant Thornton LLP at www.GrantThornton.com.

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