Wed, Jan 28, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Futures Intelligence

Practitioner Viewpoint: What needs to be done to restore investor confidence? An administrator with 30 years of managed futures experience speaks his mind.

Tuesday, March 24, 2009


Practitioner Viewpoint

Independent 3rd Party Common Sense

Derek Adler of International Financial Administration Group:

If we are to be honest, virtually each and every one of us is to blame for the unnecessary mess we are now in. I am not at all surprised by some of the problems that some money managers, hedge funds and banks have to face. We all need to think of how to improve the way we do things. For money managers, that includes hiring a third-party administrator—to my mind, an essential and now obligatory service.

Allow me to declare upfront my interest in a fund administration company. Yes, I have a vested interest, but nevertheless believe profoundly in the issues I bring to your attention.

As administrators, my partner and I always had a mantra of transparency. The only possible reason why someone does not like transparency is that there must be something to hide. Therefore all of the funds that we administer have always had a daily NAV which includes and accrues for absolutely every fee and charge. No surprises at month end.

We don't like funds that you cannot value independently via an exchange or market price provider. Whose bright idea was it to accept a market price from a source that is not independent or free of conflict? You might say that the horse has already bolted from the barn, but the truth is that hundreds, if not thousands, of funds are still engaging in questionable practices. We had funds for which we obtained valuations from independent sources, but after the investments went south, the managers requested that we either place a nil-value or in some cases a cost-value on the assets.

Let me explain why this is not correct. The nil-value, whilst admirable, is strictly not correct since as an administrator we could be accused of undervaluing. The at-cost scenario is an absolute no-no, because with certain assets today people don't have a clue as to the value and the historical cost is misleading. We have firsthand experience of this type of request and have refused point blank and resigned where necessary.

Then there's the issue of fund of funds. We will not administer the top/master fund within a fund of funds unless we are the administrator throughout. We cannot rely on other valuations that generally are not produced in a timely manner, not to mention the fact that the submitted NAV could be wrong! We have been asked to carry out forensic valuations for fund of funds, going back 3 years. Due to a discovered error, the subscriptions and redemptions turned out to be incorrect. I believe there could be more of these errors coming to the surface.

Here's another small, yet crucial, issue: the control of money movements to and from a fund. At IFINA, we are a signatory on all money movements at the fund's bank account and therefore control this aspect.

Apart from the three obvious rules of transparency, control and independent valuation, there is the problem of incestuous relationships between the investment decision maker and the administrator. How many funds do you know that have an administrator closely linked to the investment manager? They can be one and the same firm. Oh, but aren't investors safe because of Chinese walls or because the manager and administrator are part of a major bank or institution? Right! Wasn't it the big names, the ones that couldn't possibly do any wrong because they were so big, that are now gone or bailed out with our money?

These practices may not change unless regulators step in. It would be easy to end potential conflicts of interest and make the world safer for investors. There is no need for over-regulation, just common sense. I was recently appointed to Team British Virgin Islands, which is a government sponsored board comprising regulators, accountants, lawyers, banks and administrators. I am pushing hard for the total independence of all fund valuations.

I was asked in a recent interview whether I thought that banks and accountants should be able to value their own funds and my response was absolutely no! There should be no links or conflicts whatsoever.



 
This article was published in Opalesque Futures Intelligence.
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Investing - U.S. investors favor currency hedged Europe ETFs as euro tumbles, Quants win back investors as Swiss franc fuels volatility gains, David Einhorn's $7bn hedge fund is loading up on this stock, Hedge fund BlueMountain Capital unveils Ocwen Financial short, claims default on notes[more]

    U.S. investors favor currency hedged Europe ETFs as euro tumbles From Reuters.com: U.S. investors stung by the falling euro who want to stay invested in Europe are turning to exchange-traded funds designed to strip out the impact of the region's currency. The biggest among so-called "cur

  2. News Briefs - Millennials use tech tools to jump into investing, Winklevoss twins to launch bitcoin exchange with FDIC insured deposits, Robertson’s legacy from hedge funds to New Zealand, Real estate managers exploring smaller open-end funds[more]

    Millennials use tech tools to jump into investing It is the Facebookification of monetary investing. From social networking platforms that enable young investors to stick to every other's stock-picking mojo, to internet sites for initially-timers hungry for a piece of the Silicon Valley

  3. Comment - Why invest in hedge funds if they don't outperform the market?[more]

    From Forbes.com: Hedge funds have always been a bit exotic and an enigma to some, but bottom line they are supposed to produce good returns using a range of strategies including global macro, event driven and relative value (arbitrage). And, sophisticated or high-net-worth individuals (HNWIs) could

  4. Owen Li 'truly sorry' for blowing up $100m of hedge fund’s assets[more]

    From CNBC.com: A hedge fund manager told clients he is "truly sorry" for losing virtually all their money. Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm's capital—down from the roughly $100 million it ran as of late March. "I take r

  5. Indices - Barclay CTA Index gains 7.71% in 2014; largest traders return 12.31% for the year, Wilshire Liquid Alternative Index family outperforms investable hedge fund index counterparts in 2014[more]

    Barclay CTA Index gains 7.71% in 2014; largest traders return 12.31% for the year The Barclay CTA Index compiled by BarclayHedge gained 7.71% in 2014. The Barclay BTOP50 Index, which measures performance of the largest CTAs, was up 12.31% in 2014. “The BTOP50 had a strong finish, e