According to a CIBC study, 58% of Canadian institutional investors planned to increase their allocations to alternative investments this year. Alternative investments show low correlations with traditional markets and increased alpha potential, meaning higher-than-benchmark returns. With the growing reliance on alternative investments, as well as increasingly complex financial instruments and more stringent compliance requirements, the current environment is evolving rapidly. This dynamic creates significant growth opportunities for firms that offer high-quality administrative support to fund managers.
Of particular importance is the role of the fund administrator. These firms play a crucial role, acting as an intermediary between fund managers and investors, and supporting multiple functions within risk management, portfolio management and compliance.
To better understand the role of third-party fund administrators, we spoke with Tyler Kim, global head of fund services for the Maples Group. Kim joined the firm, which has more than US$100 billion in assets under administration, in 2009 to launch its Montreal office. With over 25 years of experience, he oversees fund accounting, investor services, data management and business development professionals who deliver solutions to alternative investment funds and institutional investors globally.
Why do fund managers hire third-party fund administrators?
Investors have largely contributed to the popularity of third-party administrators for hedge funds and private asset funds. Hedge funds may use sophisticated trading strategies and non-traditional financial instruments; private asset funds may have portfolio holdings that are difficult to value, and complex waterfall calculations. A third-party administrator provides independent assurance that managers are playing by the rules. Services that administrators provide cover the calculation of management fees, the independent valuation of fund assets and performance, and the production of periodic reports tailored to investor requirements. Administrators also work collaboratively with other service providers to the funds, including auditors and tax advisors.
Alongside addressing investor requirements, regulation continues to remain a focus. New and evolving reporting requirements are increasingly complex and sophisticated, demanding specific expertise outside the scope of most fund managers’ core competencies. Third-party fund administrators can help mitigate the risk of non-compliance, which in turn may trigger considerable monetary and reputational costs.
The provision of these services is critically important to enhance the comfort level of investors and to foster a relationship of trust among stakeholders. In addition, several scale and cost benefits can be realized by engaging a fund administrator.
What are the main challenges facing the industry?
There’s increased investor demand for bespoke investment products, such as funds-of-one and managed accounts, as opposed to commingled vehicles, which are easier to operate and scale.
In addition, costs related to regulatory compliance, enhanced transparency reporting, data security, and other operational expenses have risen. At the same time, there has been increased scrutiny by investors on the fees and expenses they pay. As such, one big challenge will be achieving efficiencies through automation and economies of scale to offset this margin compression.
How is Montreal a strategic location for a fund administration firm?
Our Montreal office is one of 20 within the Maples Group. It has grown year on year since its establishment and has tripled its headcount in the last five years — to more than 200 employees.
This location is beneficial in a couple ways. First, talent acquisition is backstopped by an ecosystem of high-quality universities, providing solid training for careers in our industry. Second, diversity is a reality in Montreal, allowing us to find great people from all over the world to service our international client base. Our employees hail from 50 different countries, and three-quarters were born outside Canada. This is critical for a global firm that provides support that spans cultures and languages.
Fund administrators play an increasingly pivotal role in the financial ecosystem by providing critical operational support to managers and assurance of integrity within investment funds for investors. Their independent role enhances the transparency, compliance and stability of financial markets. With a promising future based on growth prospects, fund administration firms will continue to increase their presence in the investment industry in the years ahead.
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