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Due Diligence

The Role of Hedge Fund Administrators: Now you see it, now you don’t…

Posted on 16 Jan 2013

In the wake of a hedge fund fraud, the fingers would usually be pointed at the investment management company of a fund, which is ultimately responsible for the day-to-day operations of the investment vehicle. Perhaps not as widespread, but certainly as interesting, is the case of hedge fund administrators being sued as part of their involvement in providing certain services (or lack thereof) to the industry, such as calculating the Net Asset Value (“NAV”) of a fund.

Recently, in the case of Weavering Capital (UK) Ltd (“Weavering”), the liquidator Grant Thornton has sued Dublin-based BNY Mellon Investments Servicing International, previously known as PNC Global Investment Servicing (“PNC”) for failing to carry out its services properly. PNC previously provided back office services to Weavering, including the calculation of the NAV on a monthly basis. Should this case prove to be successful, it could set a legal precedent for suing hedge fund administrators for failing to carry out their responsibilities properly.

Mr. Jerome de Lavenere Lussan, CEO of Laven Partners comments: “There is confusion in the hedge fund industry regarding the responsibilities of hedge fund administrators. Investors believe that administrators are responsible for providing valuation and accounting services to funds, in reality however the role of administrators is limited to the aggregation of data inputs when striking the NAV. In most cases the administrators are not questioning the pricing of underlying assets, leaving that responsibility to other counterparties, such as managers, brokers and auditors.”

One could argue the pattern of suing administrators was set in 2010, when Mr. Irving H. Picard, the court-appointed trustee representing victims of Madoff’s Ponzi scheme, sued UBS AG for USD 2 billion in its failings while serving as the sponsor, custodian and administrator of various affiliated feeder funds. In 2011, Mr. Picard also sued Citi Hedge Fund Services Ltd. of Bermuda, which acted as the administrator to two other feeder funds.

Such cases could potentially prove to transform the service provider industry, bringing with it a greater sense of accountability and responsibility. Nevertheless, this will only materialise if those prosecuting are able to achieve their objective in having administrators held liable for losses that arise due to clear negligence.

Laven Partners believes hedge fund investors are yet to better understand the importance of carrying out thorough due diligence on service providers. As part of Laven Partners’ Independent Process of Operational Due Diligence (IPODD), we contact third party service providers, including administrators, custodians and auditors of the funds. More specifically, administrators are contacted in order to obtain an independent track record, to verify the existence of assets of the fund, and finally, to understand what portion of the assets may be valued by the management company, if any.