Due diligence professionals need to fully understand the role of a fund administrator because they need to be able to properly question the processes and activities of that fund administrator when assessing an investment opportunity. The role of a third party fund administrator can vary widely from one fund to another and so it’s definitely not a case of one size fits all or one rule works for every occasion.
What you need to know about fund administration:
The first thing to understand is that fund administration is split into two parts, colloquially known front of house and back of house. Front of house conducts the trades of the fund, buying and selling assets. So far, so simple. Back of house have more varied duties including managing the cash position of the fund, clearing transactions, tax, audit and regulatory duties and customer interfacing issues.
When a fund chooses to engage a 3rd party administrator, they may do this solely for the back of house stuff or the third party might take over both front and back of house, or thirdly, a different third party might be allocated to manage front and back.
The role of a fund administrator can be quite varied and will change somewhat from fund to fund, however the role would typically include the following services:
- Net Asset Value calculations (NAV) on a daily, weekly and monthly basis
- Calculation and management of the fund’s income and expense accruals
- Financial reporting, financial statements, reports to shareholders and audit liaison
- Management of fund bank accounts
- Reconciliation of all statements from brokers, custodians, banks and investment managers
- Maintenance and filing of the fund’s financial books and records
- Payment of fund expenses
- Settlement of daily purchases and sales of assets
- Calculation and payment of dividends and distributions to the transfer agent
- Preparation and filing of local regulatory body filings/reports
- Pricing the portfolio of the fund, using current market rates
- Calculation of the total returns and other performance measures of the fund
- Compliance and anti-money laundering monitoring and reporting
- Supervision of the orderly liquidation and dissolution of the fund (if required)
Why is this important for due diligence:
Whether you are constructing your due diligence questionnaire or conducting a deeper investigation into the fund administrator via interviews and on-site visits, you need to fully understand what they are responsible for so as to be able to properly assess how they are performing in those duties.
Find out more about doing due diligence on a third party fund administrator.