There was a time not long ago when the question of how a hedge fund ran its back office was the furthest thing from the mind of an investor. That time is long gone.  

“I do not think you can have a hedge fund today that will attract institutional capital without having an independent administrator,” ventures Jack McDonald, chief executive officer of hedge fund administrator Conifer Securities.  

Managing institutional money—be it a plan sponsor, pension fund or endowment—has become a hedge fund staple. That in itself is a startling development: Less than a decade ago, the institutional market was married to the mutual fund industry. Hedge fund investing, in turn, was deemed an exotic foray. But when mutual fund performance tanked, the institutional market turned to the hedge fund space for alpha. Today, the hedge fund industry is part of the mainstream financial marketplace. With that, the institutional requirement for mainstream operational procedure has been foisted on the hedge fund industry. This in turn left the industry—lacking the in-house capacity to pass institutional muster—with one choice: Take the high road and outsource to a third-party administrator like Citco, GlobeOp or SEI.

And for its part, the asset class has toed the line: According to the Q1 2008 HFN Hedge Fund Administrator Survey, the industry has $2.759 trillion in capital now under administration. Consider that the industry is now at $2.848 trillion overall, and it would be hard to argue that the asset class has slacked off on the demand for top-notch administration. Meanwhile, the institutional set has gained plenty of ammunition for their argument.  

“There is a lot of institutional concern about the integrity of the data,” said McDonald, whose San Francisco-headquartered Conifer has $3.69 billion under administration. “There have been too many blowups and too much fraud. I think the day of self-administration is over.”

His opinion has a wide audience. Oaks, Penn.-headquartered hedge fund administrator SEI published a report titled “Five Critical Challenges for Hedge Funds Taking Aim at the Institutional Market” that, in effect, noted any hedge fund looking to manage institutional capital must itself act and look like an institution. Having an in-house back office resembling a skeleton crew of a traditional back office is now out of the question. Instead, a full infrastructure with a state-of-the-art technology is the rule.  

Given the ever-increasing scrutiny all-around, one institutional requirement in particular, reporting, has taken on a particular significance.

“Our client base has a very large institutional client base, so the requirement around reporting and transparency has continued to expand,” says John Alshefski, senior vice president in charge of business development for SEI, which has $47 billion in hedge fund capital under administration.

That demand has become a top concern for SEI.

“From our perspective, we are working hard to provide more timely valuation,” Alshefski says. “We are even seeing some movement into daily valuation.”

The recent volatility in the financial marketplace has also driven the need for daily net-asset-value and portfolio reporting. In the face of an up-and-down market, risk management has taken precedence. To that end, reporting can act as a powerful tool.

“The ability to perform daily rather than monthly processing and reconciliation is becoming more commonplace—allowing enhanced monitoring of performance and risk,” says Tim Howell, head of HSBC Securities Services.

Howell, whose HSBC has $227.51 billion in hedge fund capital under administration, says market shakiness, scarce liquidity, investor weariness has “permeated” client discussion.

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