How are current market dynamics affecting the fund management arena?
The last few years have brought unprecedented challenges to the hedge fund industry as a whole, which in turn have filtered through to the prime brokers, banks, fund administrators and other service providers.
The strain on operating margins is driving a greater focus on cost efficiencies by fund managers. This is particularly the case given increasing pressure from institutional investors to lower management and performance fees, with the resulting reduction in returns meaning that managers are having to re-evaluate their own cost structures and the total expense ratios for funds.
Outside of trading fees, the administration costs can make up a large portion of a fund manager’s cost structure. Administrators are therefore increasingly looking beyond the traditional parameters of their role to find ways in which they can help managers achieve greater operating and cost efficiencies, while still maintaining their price competitiveness in a crowded marketplace.
In addition, there has been a significant increase in global regulatory reporting in line with the general co-operation with G20 and Organisation for Economic Co-operation and Development initiatives for Exchange of Information Agreements, with notable examples including the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard (CRS) and more recently the Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive (MiFID). These regulations have significantly ramped up reporting requirements and in turn increased fund managers’ reliance on administrators to perform such tasks. Solvency II has further added to this as it will require fund managers to provide information on underlying investment positions to their insurance client investors.
I would also add that the maturing of the hedge fund industry, coupled with current market conditions, is seeing fund managers looking at product innovation to broaden their appeal. This can mean launching new products within the existing suite of funds, or expanding managed accounts to offer unique investment strategies, rather than launching new fund offerings.
How would you say these are influencing the client relationship and the role of the fund administrator?
In our view, these factors are strengthening the relationship between fund manager and administrator. More and more functions are falling under the remit of the administrator that would previously have been performed in-house, for example. Fund managers are also becoming more demanding in terms of the overall capabilities they expect from their administrator, with growing regulatory pressures meaning they are looking for those that can clearly demonstrate the knowledge base and caliber of personnel to fulfil this expanding reporting role and act as an effective information conduit to the investor.
In addition, fund managers are investing more and more in technology to support a number of different business tasks. However, often the fund administrator is better placed to provide the necessary support and information from previous rounds of technology spend, and their ability to achieve this serves to further enhance their standing in the eyes of the client.
The depth of the relationship will of course vary from client to client. Some fund managers will pass the majority of functions to their fund administrators, while others may look to keep a tighter rein on specific aspects, such as dealing with investors. There is no one approach that works for all. The service offering must continually flex to match the requirements of the fund manager, evolving in tandem with their changing needs.
Market dynamics are placing a greater onus on fund managers to assess the competency of administrators in dealing with the client reporting and to ensure they have sufficient oversight to guarantee their clients’ needs are being met. There has also been a clear shift towards a more compliance-oriented approach when selecting the appropriate administrator. Today, for example, no service provider due diligence is complete without an external control audit such as the Statement on Standards for Attestation (SSAE) or International Standard on Assurance Engagement (ISAE) on the entire business model.
While regulatory changes are placing greater demands on the fund industry, we are also seeing changes designed to facilitate the growth of the industry, such as the recent amendments to the Partnership Law in Bermuda. Can you outline some of these?
Bermuda introduced a number of amendments to its Partnership Law to help broaden the island’s appeal as a location for conducting international business. One of the most significant changes allows partnerships from any jurisdiction to relocate and continue business operations in Bermuda without having to dissolve the existing structure. Changes to the law also mean it is possible to convert a partnership into a company, or a company into a partnership, without having to wind up or dissolve it to change its legal status.
Further, the amendments have expanded Bermuda’s safe harbor provisions, providing additional flexibility in terms of managing and operating a Bermuda partnership. A limited partner can now make enquiries about the affairs of the business without being seen as influencing or participating in the operations of the entity and thereby avoiding any potential liability.
Limited liability company (LLC) legislation has also been tabled in the House of Assembly in Bermuda and is modelled on the Delaware LLC legislation. This is another tool for attracting US business, as the Delaware structure is something US counsel and investment fund managers are very familiar with. It is tried, tested and trusted. By modelling the Bermuda LLC on Delaware’s legislation, it will ensure confidence in the structure from the outset.
Also, currently the structures and constitutional documents of the onshore Delaware limited partnership (LP) and the offshore Bermuda limited company are very different. The introduction of the Bermuda LLC will help provide a level of consistency between the onshore and offshore documents and make the process of establishing such entities far more straightforward.
Finally, the Cayman Islands’ Limited Liability Companies Law, 2016, has already been introduced. This has also been modelled on the Delaware structure so is similarly attractive to US fund managers; it has been well received by the industry.
What other developments have we seen that will influence the standing of the fund sector in Bermuda?
Another development is the island’s application for EU passporting rights for alternative investment fund managers, which is currently pending. This will allow Bermuda-based alternative investment fund managers to market their funds and services throughout the EU without the need to secure individual member state approval. Bermuda is one of nine potential early adopters of the passport, along with Australia, Canada, the Cayman Islands, Hong Kong, Isle of Man, Japan, Singapore and the US, and is working closely with the European Securities and Markets Authority on this. If the application is successful it will significantly elevate the island’s standing as a jurisdiction to launch offshore funds, in the eyes of fund managers.
Updates to the Proceeds of Crime Act were also introduced on 1 January. These increase the scrutiny applied to the movement of money through fund structures, both in terms of money entering and exiting the structure. From a service provider’s perspective, it places a greater onus on us to ensure we have a robust anti-money laundering/anti-terrorist funding (AML/ATF) framework and that we conduct stringent tests to maintain the reliability and integrity of our risk management functions and internal controls. Additionally, we have to enhance the scope of the audit that we carry out on our AML/ATF programmes.
Stepping back, where do you see the opportunities to further advance the administrator/client relationship?
Data management is becoming an increasingly prominent component of the administrator’s role as they immerse themselves more and more into the data stream that underpins the fund itself. This will require advances in both technology and process by fund managers and service providers alike to ensure the timeliness and accuracy of investor and regulatory reporting.
As assets under management continue to grow and funds expand into new jurisdictions, the flow of data from fund manager to service provider needs to be as seamless and as accurate as possible. This expansion brings with it increasing complexity, which in turn increases the importance of the middle-office outsourcing capabilities of the service provider, as these enable the fund manager to focus on their core role which is to generate returns for their clients.
Investors are increasingly viewing outsourcing as a cost saving to the fund manager, both in terms of the skill sets that fund administrators offer in respect of the size of the funds serviced, and the fact that fund administrators are often ahead of the curve in terms of their technological capabilities.
Data access via secure web portals is one such capability that is critical to the investor. This is particularly the case given the need to have holdings or positions available 24/7, as well as investor reports and statements. Self-service tools are another important component, allowing the investor to update pertinent account details via the same secure portal. However, the challenge for the administrator is often that they are dealing with legacy systems that do not cater for web access by investors.
What developments has Kane LPI seen in its fund administration division?
There have been two significant developments in recent months. Firstly, in Malta we recently received recognition as an Administrator of a Collective Investment Scheme under the Investment Services Act, 1994. This is key to our efforts in expanding our activities in Malta itself, as well as broadening our access to the European funds market.
We have also received our corporate management license in the Cayman Islands. The island remains the leading jurisdiction for the establishment of offshore hedge funds and provides an ideal platform for us to grow our presence in the Caribbean and the US. This license enables us to form entities, act as a registered office for funds and provide director and corporate secretary services to the vehicle.
Kane LPI has also become a member of the recently formed Alternative Investment Managers Association (AIMA) Chapter in Bermuda. The role of the AIMA is to help raise the profile of the fund sector and to ensure that the island’s fund industry embodies global best practice. This is a fantastic opportunity to play a more proactive role in helping to shape and guide the asset management industry on the island and I am delighted to have been appointed to the chapter’s executive committee.