A few years ago I received a call from a government regulatory agency. They said that I had been selected at random for an audit of my trust fund account. According to the auditor it was just a routine random audit to check if everything was being done properly and to advise me of any procedures that I might not be doing correctly.

As things turned out, there were a few things that they were not pleased with. First and foremost was my habit of paying client invoices before receiving client funds. I was never very concerned since the trust fund always had a balance of several hundred thousand dollars and the negative client balances were never more than a few thousand dollars at the most and only for short periods of time. I knew that anytime I needed to bring the client's balance positive I only had to call the client and the funds would be sent immediately. Given that I was also habitually behind in my trust account reconciliation, it would be an understatement to say the auditor was not happy. While I understand the necessity of performing random audits to check whether the books are in order, I must admit I was not thrilled when I received a two year restricted license for not following proper accounting procedures.

What does this have to do with hedge funds? For me, my experience only emphasizes the fact that in today's regulatory climate, with the SEC taking a more personal interest in Hedge Funds and with anti-money laundering "know your client" requirements, a Hedge Fund Manager needs all the professional expertise he can get. I believe for a Fund Manager to try to go it alone is not only foolish but highly dangerous.


A good professional outside Administrator is probably the best investment a Hedge Fund Manager can make. The main advantage that an Independent Administrator brings to the table is the comfort that is provided to investors. "Administration", in the context of Hedge Funds, means, in effect, the management of the Fund in virtually all aspects of the day-to-day operations of the Fund, except the actual investment of the assets, which is the responsibility of the Investment Manager. In this role, the Administrator is always answerable to the Board of Directors or Trustees of the Fund and does not have any actual management control. In simple terms, an Administrator is responsible for ensuring the efficient operation of a fund, whilst at the same time relieving the Investment Manager from having to do all the boring stuff, such as: (1)

1) Calculating the NAV and the NAV per share or unit, as often as may be required by the Fund or its Board;

2) Keeping the accounts and financial records;

Preparing the annual audit file and liaising with the Auditor;

Liaising with prospective investors and sending out the offering documentation;

Calculating, confirming and arranging payment of all subscriptions, redemptions, fees and expenses, and arranging for the payment of all dividends or other distributions, if required;

Often the Administrator will also act as Registrar & Transfer Agent, handling the registration of shares and liaising with shareholders with regard to subscriptions, redemptions and transfers;

The Administrator will maintain a copy of the Share Register at its office and, if the Administrator is not resident in the domicile of the Fund, ensure that the original, or a copy of the original Share Register, is held in the Registered Office in that jurisdiction, as required by local regulations;

Carry out anti-money laundering due diligence with regard to investors;

The Administrator may also act as Company Secretary — and will therefore be responsible, amongst other things, for arranging Board Meetings, calling the AGM and preparing Board Minutes;

Maintain the statutory books and records;

If the shares of the Fund are listed on a Stock Exchange, ensure that the Company and the Directors comply with the ongoing obligations of the relevant Stock Exchange;

Be the interface between the Manager and Investors; and

The Administrator is also responsible for ensuring that the Fund complies with the terms of its Offering Memorandum in many ways, including, in some cases, reviewing the management of its investment portfolio with regard to, for instance, investment restrictions and diversification requirements.

This is not an exhaustive list of an Administrator's duties — but should give you a reasonable idea of what is involved. In summary an Administrator should be responsible for making sure everything is done to enable the fund to run efficiently in all aspects, except the management of the assets — that is the Investment Manager's task

(1) Web Site: Dermot S.L. Butler, Chairman Custom House Group, "Getting the Most from your Service Providers" - 9th Annual Hedge Fund Forum - Tuesday, 4th of June, 2002.


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