Yes We Do! | Chief Investment Officer

From aiCIO Magazine: This is the new era of fund administration—the ‘Yes We Do’ era, not just for administrators, but for managers, as well as end investors. Bonnie Scott reports.

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“Yes We Can” —the mantra of the A Obama campaign—is starting to lose its luster. Just as we are realizing that the jingle isn’t enough to solve the current crisis, so too are hedge fund administrators changing their tune. “The time when you could say you could do anything and not have to back it up has passed,” says Jim Kelly, Chairman and Co-Founder of fund administrator HedgeServ.

Post-credit crisis, the fund administration business is more competitive than ever. The past three years have seen many administrators hit by falling asset-based revenues and fewer funds to compete for. Still, despite a shrinking hedge fund industry, with assets under management and leverage at lower levels than just a few years ago, fund administration has become increasingly important in the wake of Lehman, Madoff and other blowups, with clients and end investors demanding much more.

With the increased competition in the industry, administrators need to find a way to stand out from the crowd. As Jonathan White, Business Development Manager at Viteos Fund Services, points out, “Many end investors do not want to hear what a provider can or could do. They want to know providers are already actively doing these things for clients. They want a ‘yes we do’ rather than a ‘yes we can’ provider.”

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Moving Up the Value Chain

Until recently, hedge fund administration was a commoditized business. Before the crisis, half the job of administrators was to keep up with demand. After Lehman and Madoff, a few things happened. Hedge fund assets declined significantly, which meant revenues for administrators went down. Administrators also have been forced to invest a lot more in their platforms in order to have a competitive, robust, and global infrastructure. Most notably, perhaps, has been the move away from providing only core administration services to offering more middle-office and add-on services with the industry’s renewed focus on risk management, regulation, transparency, and delivery of information. Thus, we are now seeing administrators, both big and small, quickly move up the value chain.

Timely and accurate NAVs, transparency in the valuation process, reporting, SAS 70 Level II certifications, liquidity, independent fund accounting—all of these things are now critical, as the increased participation (particularly from institutional investors) in hedge funds has raised the pressure on administrators to execute on these tasks reliably, accurately, and against the time demands set by the market and fund managers. “Being able to claim you provide full service is no longer just about doing books and records, it is about providing operational support,” says Viteos’ White. “Investors aren’t just ticking the box anymore. They are asking tough questions.”

With more scrutiny from investors— and fewer funds to compete for—not every administrator can win. With the move away from the self-administration of the pre-Madoff era, independent fund administrators are now in high demand but, in addition to wanting independence, investors and managers also are attracted to global brand names and well-capitalized administrators. Lee Partridge, outsourced CIO of the San Diego County Employees Retirement Association (SDCERA), questions the shelf life of smaller administrators, “Just as we (the end investor) often gravitate toward larger funds, managers also gravitate toward larger administrators. The sleep-at-night factor is much better.”

This is the challenge that smaller administrators have to overcome—and it appears that many are succeeding. “Some funds feel the need to put a big name in their docs, but for those who are truly focused on getting the right service, we definitely get a fair shot,” says Joan Kehoe, CEO of Quintillion. Moreover, small does not equate with limited service. As White argues, “We might be small but we are not boutique. We have complete coverage of all asset classes as well as global coverage.”

Going with the big names may have been the right decision pre-crisis but, with investors now more concerned with the back-office operation of hedge funds, funds are looking to administrators for solutions to their reporting and operational needs. White observes, “The conversation is no longer just about fees and services. Clients want to know how you are going to address their other business challenges.”

One Piece of the Puzzle

Still, hedge fund administration is only one piece of the puzzle. If Madoff taught investors anything, it is this: Buyer Beware. If anything, administrators are simply one line on a long list of due diligence requirements for asset owners when choosing a hedge fund vehicle. Partridge, who joined SDCERA shortly after the fund suffered large losses with hedge fund implosion Amaranth, reflects: “I don’t know that Amaranth could have been completely avoided. You really have to know your manager. I don’t think even today’s administrators could have prevented Amaranth.” With any potential misrepresentation of material facts, it is always good to get as much independent verification as possible—but administrators are not the complete solution, Partridge notes. “I think the larger issue is understanding the sources of risk and how they overlap with each other,” he adds.

While Amaranth may not have been avoided even with the best administrators, the industry seems to be maturing. This is the new era of fund administration—the ‘Yes We Do’ era, not just for administrators, but for managers, as well as end investors.

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From aiCIO Magazine: It is a curious twist of historical fate: Two bodies established to enshrine the past of an impoverished nation are the forerunners of a very wealthy future. Nick Lord reports.

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Turkey is a land rich in history, culture, and passion. It has not been known as a country rich in capital. For much of the 20th century, it was the sick man of Europe, lurching from one economic crisis to the next. Yet, with a now-booming economy and changes to asset management legislation, newly wealthy institutions are emerging.

Two little-known academic institutions perhaps best show how this is happening. At the foundation of the Republic of Turkey in 1923, many of the assets from the remnants of the old Ottoman ruling empire were put into foundations. These included some 11,000 buildings as well as art and other historical artifacts. In many ways, this summed up modern Turkey’s rather confused approach to its past. Sure, it existed, but people were not really sure of whether they approved of it or not.

To counter this and to spread the notion of a purely Turkish history (rather than its Ottoman past), two foundations were established: the Turkish Historical Society and the Turkish Language Association. Both focused on the study of purely Turkish history and language rather than the multilingual and multicultural Ottoman period. Both foundations were set up by Kemal Ataturk.

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Ataturk is credited, through fact and myth, with creating most of modern Turkey, including one of its biggest private-sector banking groups called Isbank. Upon his death, he willed that his shares in Isbank— now 28% of the issued share capital and officially called “Ataturk’s Shares” —be divided: The votes that these shares carried would go to his political party, the CHP, but the dividends would be shared between the Turkish Historical Society and the Turkish Language Association. This arrangement did not really matter for much of the 20th century: Isbank grew along with the Turkish economy, but its performance was stymied at regular intervals by the periodic busts that Turkey endured. The persistently high inflation ate away at any capital that the foundations enjoyed.

Fast forward to the beginning of the 21st century. In 2002, Turkey was just coming out of its last crisis. Scores of banks had gone bust, inflation was touching 100%, and the currency was teetering but, since that time, the country has undergone a complete economic renaissance. It is now the fastest growing economy in both Europe and the OECD. Inflation is back to single digits, having stabilized at between 7% and 8%, and the banks are making huge profits. For Isbank, this has meant nearly a decade of paying high dividends. Between 2003 and 2009, it paid out some TL2.15 billion (US$1.4 billion) to shareholders. This means that in the last six years, the two academic research bodies have received some $400 million between them.

Finding out what these societies do with this money is not difficult. The Historical Society organizes four yearly congresses of Turkish history, publishes 30 periodicals and maintains a library of 250,000 books. The Language Association maintains the official dictionary of the Turkish language. Yet, while these are worthy academic pursuits, they probably do not need $415 million in capital to finance them. As a result, these two societies have become capital-rich endowments, more in line with the bulging coffers enjoyed by U.S. academia in the heady days before the crisis.

Unlike U.S. endowments, however, the money is still flowing in. Isbank, this year, is forecast to make almost $2.2 billion in pre-tax income. If it maintains its payout ratio of 23.2%, this means the foundations will receive somewhere north of $140 million in this year alone.

Until now, there has been very little to do with this money apart from investing it entirely in government securities. Indeed, the law still states that most asset owners in Turkey have to put around 95% of their money into government bonds. However, that is changing: The national capital markets regulator is loosening these requirements, a result of the government’s borrowing needs being much less than they once were. They are also part of a package of reforms to boost the development of the local capital markets, including the asset management industry. For instance, these changes will allow the nascent Turkish pension industry, which has grown to a total asset base of $4.5 billion from zero five years ago, to move into other securities. This will spawn the development of an asset management market in line with other European countries, even if only a fraction of the size—for now.

Things change quickly in Turkey. As these regulations change, other bodies— like the Historical Society and Language Association—will emerge as serious institutional investors in their own right. It is a curious twist of historical fate: Two bodies established to enshrine the past of an impoverished nation are the forerunners of a very wealthy future.

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