Hedge Fund Intelligence New standards in Investor Transparency | Page 19

NEW STANDARDS IN INVESTOR TRANSPARENCY

BNY Mellon, so the decision to appoint Northern Trust as a shadow means that
the fund now effectively has two administrators.
Northern Trust is now in the process of going live on the shadow administration.
“The way it works is that we take a feed from BNY Mellon every day and then
compare with more than 50 datasets to our own calculations for any discrepancies,” says Cherecwich.
Gilding the lily? Not at all, says Northern Trust. “The benefit to Bridgewater is
that it has a full control, check and balance against every single cashflow generated
within its super-large and super-complex portfolio,” says Sanchez. “Second, it now
has an embedded business resiliency and contingency plan.”
Cherecwich says that the Bridgewater initiative probably represents the tip of
the iceberg for shadow administration in the alternative asset management space.
“In the traditional world, about 25% to 30% of managers have outsourced their
middle office to shadow administrators,” he says. “I believe the same thing will
end up happening in the hedge fund world. What will drive this process will be
continued pressure on fees. As long as hedge fund managers could depend on
being paid 2+20, they may have believed they could manage the middle office
in-house. As soon as fees start moving down towards 1+10, they may start to see
it as too much of an expense.”
It is true that pressure on fees appears to be heralding the demise of the traditional 2+20 structures that hedge fund managers have enjoyed for many years.
According to Deutsche’s recent survey, 2+20 is no longer the fee norm, with
investors now paying average management and performance fees of 1.7% and
18.2% respectively.
But surely, appointing two external administrators rather than one inevitably
drives up – rather than reduces – a manager’s costs? After all, according to Cherecwich, Northern Trust has had to hire around 100 extra staff to work on the
Bridgewater project.
Sanchez says, however, that net costs are ultimately reduced through higher
efficiencies. “When you think about the costs of maintaining an in-house middle
office and accounting system, they are considerable,” he says. “Firms invest a great
deal in their business resiliency contingency planning, but when that is all embedded into an outsourced shadow relationship the total costs are probably equivalent if not slightly lower.”
© HedgeFund Intelligence

June 2014 Special Report 19