Funds of Funds
While funds of funds have been a separate class of investment
product for decades, there is no doubt that in recent years they
have become increasingly popular, particularly as vehicles to
diversify risk.
The administration of funds of funds products has always been an
area requiring extra care over and above that needed to administer
more traditional cash, bond and equity fund products. IAG
provides bespoke administration services including funds of
funds for hedge fund managers, in particular with regard to the
more complex structures.
The features of funds of funds requiring specialist skills
include:
- Investments in other funds: When the portfolio
is being re-balanced it is imperative that money is quickly and
accurately re-allocated to avoid the dangers of missing a
subscription or redemption date and being in or out of the market
for an unnecessarily long period of time.
- Incentive fees: Incentive fees are a
recognised feature of both funds of funds and the funds in which
they invest. In setting up a fund, the input of an experienced
administrator in the creation of a fair and workable incentive fee
structure is vital.
- In addition, the incentive fee suffered on portfolio funds is a
significant factor requiring care and attention. Hedge funds
typically have monthly equalisation share issues or redemptions to
reflect performance fee allocations; alternatively, or in addition,
they may issue a number of different share classes, each
with its own net asset value.
- Capital calls and distributions: In a fund of
private equity funds capital events in the form of calls and
distributions are regular occurrences. Each has to be correctly
treated in order to ensure that the fund is correctly valued. The
details of call and distribution notices must be scrutinised to
apply the appropriate accounting treatment.
- Structures: Recent developments in funds of
funds products have led to a growing complexity in fund structures.
To ensure optimum fairness in incentive fee allocation, the use of
multiple share classes and equalisation arrangements is becoming
commonplace. To satisfy US investors there is an increasing demand
for open ended limited partnership structures which create
additional specialist administrative requirements and
know-how.
- Relevant experience: To administer your fund
of funds product an administrator needs to have relevant and up to
date experience in administration of today's funds of funds. It is
not enough to have experience in administering other fund types,
and, increasingly, it is not enough only to have administered the
more traditional fund of funds products that have been used for
some years. IAG's principals have administered funds of funds since
1992. We therefore know and recognise the challenging nature of
funds of funds and provide an administration service to the very
highest standards.