Hedge fund managers have three pet hates when it comes to administrators: inaccurate reporting, refusal to take accountability and an inability to deal with non-standard queries. These are among the most significant criticisms of administrators levelled by hedge funds in Centaur Fund Service’s latest fund administration survey (See Fig. 1). Aware of the growing gap in the fund administration industry between a) what it currently provides, and b) what the client actually wants, Centaur has moved quickly to develop services to fill this need. The Dublin-based fund administrator innovates by using a somewhat old-fashioned formula: putting the client first. Transparency, accountability, integrity, continuity almost seem a bit outmoded in an industry where growth has occasionally been perceived as semantically contrary to responsibility. Yet these principles are at the core of Centaur’s offer. And at the heart of the clients’ needs.
Fund investors, directors and managers have in common an involvement in the same fast-changing, increasingly regulated industry, but are also mostly dissatisfied with the administration services they are provided, Centaur’s survey shows. They do not feel they are receiving a personalised service. Moreover, they don’t believe administrators are accountable for independently verifying that assets exist or are independently pricing portfolios.
Existing funds move to Centaur
Centaur’s survey shows 58% of fund directors have actually terminated an administrator’s appointment due to poor service and lack of accountability. In the past, changing administrators was like waving a red flag, but the stigma attached to swapping service providers is subsiding and seen as positive when there are valid reasons for the move, says Ronan Daly, the executive chairman of Centaur. Indeed, two-thirds of Centaur’s clients are existing funds moving their administration business to them from other service providers.
“The fact that we’ve already had a dozen groups move to us tells you that there is a real service problem out there,” says Daly. “Some people have been serviced terribly. When we get talking to them we find they really want to move and they’re ready to make a very positive commitment to us. This helps create a very strong tie with them.”
A personal touch
Hedge fund managers don’t change administrators overnight. And when they do, Daly says, it’s hardly ever about cost, but about service. The chairman of Centaur spends a lot of time talking to hedge fund managers, something he likens to a doctor patiently listening to a patient describe their symptoms. “Very often, they don’t even know they have poor administrators,” says Daly. “It’s almost subconscious. The service they’re getting has deteriorated so much they’ve almost not noticed, or they’ve just accepted how bad it has become over the years. So when we come up with a proposition which is demonstrably better, they listen.”
Centaur offers fund managers and investors accountability, openness and transparency. Among administrators, Daly says poor transparency, low levels of engagement as well as a lack of dialogue and accountability characterise the current service offered to many hedge funds.
“We’re swimming against the tide in many ways, but what we offer has been very much appreciated and picked up, not just by hedge fund managers, but very importantly also by hedge fund investors and the other group that actually appoints us: the boards of directors of hedge funds,” Daly says. “Accountability isthe core ethos of our business.”
Focus on human capital
Centaur’s strong client focus results mainly from its use of human capital to provide tailored services. The way the company recruits, trains and structures staff is completely different to the low-cost, low-service model now commonly offered by many other administrators.
Centaur makes a point of only hiring the most skilled individuals in the fields of accountancy, investor servicing, law and company secretarial, the main areas of administration service provision. These first-rate recruits are then provided with Centaur’s professional training in order to use its leading edge technology and infrastructure to deliver accurate and on-time reporting. Finally, the staff is organised in dedicated, client-based teams taking full responsibility for specific accounts to ensure a customised level of service to each stakeholder. This helps create a responsive and dynamic relationship with the client.
“We want staff who feel the way we do about the business and providing a service to clients,” Daly says. “The services we offer do not lend themselves to functionalisation and the professionals we hire are capable of delivering a well rounded, full service to each stakeholder. We want employees who share our beliefs in people’s accountability and a client-orientated service.”
Centaur invests substantial time and effort in its staff. This contrasts with the reduction in service provided by larger competitors. In many cases, these administrators have been taken over by large financial institutions as part of the industry’s consolidation over the past several years. Economies of scale rather than client service become the focus.
A professional services business
This underscores the problem with large administrators: they treat administration services as a transaction business. With Centaur, however, administration is seen as a professional services business.
“Hedge funds by nature require administrators to really understand the product, strategy and structure – it is important that this understanding is not lost to functionalisation or geographical split,” says Gavan McGuire, Centaur’s head of business development.
Clients appreciate this high-touch approach. “Centaur has been an excellent choice of administrator,” says John Mansell, chief operating officer and chief finance officer of Polar Capital, which had assets under management of $4.2 billion at the end of 2011. “As an organisation, it employs intelligent, knowledgeable and experienced staff to carry out its activities. This enables Centaur to deliver an excellent administrative service to us. The service is accurate, complete and timely. These are all characteristics that are sought from an administrator. In addition, Centaur is responsive and involved which makes the day-to-day operation of the fund smoother.”
Centaur’s clients – mainly boutique managers and some institutions, including an-LSE listed company and a large European bank – value its bespoke work culture. Employees also value this as shown by the complete absence of turnover amongst its 35 staff. It means Centaur can offer continuity of service. Combined with a focus on controlled growth rather than rapid expansion, it means that Centaur is organized to provide the best possible service to existing and future clients. “We want to grow the business at a controlled rate, with the right type of clients, who will benefit from the value-add from Centaur,” McGuire says.
Expertise is invaluable
Centaur is not compromised by conflicts of interest or competing business lines. All investment and focus by the senior management goes into providing a first rate service to the main stakeholders. There is, however, something else Centaur provides, that clients really appreciate. It is quite simply experience, yet Centaur doesn’t charge for it.
The four members of senior management have worked together asa team since 1997. Prior to launching Centaur in 2009 the three co-founders, Ronan Daly, Karen Malone and Eric Bertrand, who were joined by Gavan McGuire in 2010, worked together running and growing BISYS, one of the largest fund administration businesses in the world with client assets of over $200 billion. They have been actively involved in the fund servicing industry in Europe, North America and Asia, in excess of 20 years. Centaur’s principals are also frequent speakers at industry conferences and participants in leading edge research and study groups such as AIMA, IFIA and IOSCO.
This pool of knowledge and contacts offers clients a dual benefit. It enables the senior management to be actively involved in client service delivery and to provide a range of services beyond pure administration.
“We help groups through all sorts of issues,” says Daly. “Literally from finding the right staff members, adapting technology, through to explaining new accounting rules or tax implications. We offer a fully ‘rounded’ type of service for the client.”
Centaur believes so passionately that administrators must take responsibility for the accuracy and timeliness of their work that it has ‘accountability counts’ as its motto. The company contracts to clients on these terms and stands behind its product by signing up to detailed binding deliverables in its Administration and Service Level Agreements. In addition, it has a full commitment to ISAE 3402 guidelines on its core services.
To deliver the highest levels of accuracy and transparency, Centaur has invested heavily to equip itself with optimal infrastructure and technology. It uses Sungard Invest One, a leading fund accounting system, and on the investor services side, it runs HWM Mantra.
Centaur’s offer to clients goes against the refusal among increasing numbers of administrators to accept responsibility for asset valuations as they become more institutionalised and process-driven. An alarming and growing number of the hedge fund managers surveyed are unhappy with this as it can create internal problems and potentially damage a fund’s credibility. Often administrators will obtain securities prices from providers like Bloomberg or Thomson Reuters, but they won’t analyse those prices. Another damaging, and very widespread practice, sees administrators use prices provided by hedge fund managers.
“It’s brushed under the carpet, hidden, the fact that sometimes, it’s very unclear where the valuation is coming from,” says Daly. “If it’s wrong, who’s going to be held responsible? We’re not saying we have an incredible system that can value every security type on the planet but before we even take on business, we try to get a real look at the securities and try to get into a dialogue about what they are and how they should be valued. That’s not a weakness: instead, it’s a strength to actually be quite critical before you take a business on.”
As an administrator, Centaur sees its main job as making sure the assets actually exist, independently reconciling all the accounts, and standing behind the valuation. To avoid any ambiguity, Centaur will create a valuation policy for each fund and it will contract to follow that pricing policy. Highly customized, frequent reports will ensue and provide managers, directors and investors with all the information they need – and are entitled to.