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Alternative Market Briefing

Other Voices: Chasing shadows: should hedge funds shadow administrators?

Wednesday, March 27, 2013

This article was provided by Bijesh Amin, Co-Founder/Managing Director at Indus Valley Partners.

To shadow or not to shadow

At least that is the question facing many large hedge funds with assets well above the magical $1bn mark.

The production of a portfolio NAV (Net Asset Value) is the basis upon which investors pay fund managers their performance fees on the one hand and often the basis upon which they give capital to funds on the other. The majority of hedge funds use a Fund Administrator (e.g. Citco, GlobeOp, BNY Mellon etc.) to calculate their NAV and in some cases perform a range of portfolio accounting functions, reconcile their trades, and prepare investor reports.

Investors will often insist on the use of a fund administrator given they can be seen as an impartial 3rd party to value portfolios, and in light of well-documented be a sensible requirement.

However the handing over of such a key metric such as NAV is causing sleepless nights for many funds, particularly those trading illiquid assets (which can be price that can be seen from a Bloomberg terminal or Level 3 assets in valuation parlance). Portfolio managers may be loathe to hand over the basis on which their performance fees are calculated to people who do not trade the asset classes for a living and have probably never been practically or academically trained in the valuation of those assets.

So naturally the question arises that even if an administrator is being used, should a ......................

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