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I am spending a lot of time in London at the moment talking to fund managers, investors and various fund counterparties. It seems clear from talking to investors that their big concerns over administration focus on two main issues:

1. Do the assets actually exist?

i.e. is the administrator independently reconciling the fund’s accounts and checking that the assets are registered in the fund’s name?

2. Is the administrator independently pricing the assets or are they taking prices which they haven’t verified – from the manager or other sources – and putting them into the NAV.?

These concerns are entirely sensible in light of all of the frauds and blow ups which have happened over the years which have basically boiled down to either the assets not existing (eg Madoff, Manhattan) or the assets being mis-priced (eg Beacon Hill, Simon Treacher’s fund at Blue Bay). Indeed, some large investor groups are asking administrators to independently verify to them each month the percentage of assets that have not been independently verified and the percentage of assets that have not been independently priced. Again, this seems logical and sensible to me.

With that in mind I met with a couple of large prime brokerage groups to enquire how much importance start up hedge fund managers attach to these matters when selecting an administrator. I was completely taken aback to hear that the issue of independent valuation has “never come up”. Independent valuation is not even on the list of key selection criteria when choosing an administrator.

It seems that the interests of investors – which they are airing pretty clearly on their websites and industry forums – are being ignored by start up managers. A pretty shocking state of affairs when one considers that without the investors’ cash, this industry wouldn’t exist.

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