Upping the Ante in Hedge Fund Administration

Why LaSalle thinks it can do a better job

Originally published in the March 2008 issue

Last year was an interesting time to be launching a new fund administration business. The market was on the verge of entering a phase when large swathes of credit assets would suddenly become more difficult to value. There was increased regulatory and investor scrutiny on the role played by fund administrators in the whole hedge fund operations equation. And the Irish back office market, long the solid engine room that kept the European hedge funds industry ticking over, was facing increasing pressure on labour resources, with salaries spiralling upwards, and senior management teams leap-frogging around the market.

As if that were not enough, an increasingly popular question being raised on the conference circuit was the direction the whole fund administration industry was taking: would acquisitions of smaller, specialised hedge fund administration shops mean an increasing degree of institutionalisation, the loss of the old boutique-style administrator that had supported many leading hedge funds in days of yore?

Into this increasingly competitive and high pressure market stepped LaSalle, with its brand new European hedge fund administration operation. Backed by its US parent’s extensive expertise in the CDO market (LaSalle Bank was the top-ranked trustee for CDOs issued worldwide in the first half of last year, with a 25% market share), and with a senior management team of experienced Dublin administration professionals, LaSalle felt equipped to address many of the concerns being raised within the industry.

For starters, LaSalle gets the best of both worlds, the specialist boutique feel that stems from being small and able to provide new clients with a high touch level of service that has evaporated amongst some of the bigger houses, coupled with the institutional credibility of its banking parent. But beyond that, it is not being intimidated by the prospect of taking on funds with increasingly sophisticated portfolios, including OTC derivatives and CDOs.

Going the extra mile

“We aim to be neutral when it comes to assets, strategy, or location,” explains Morgan Downey, Managing Director of LaSalle Global Fund Services Europe. “We don’t think of ourselves as being experts on one asset type; we’d like to be approached by managers regardless of what they’re managing, be it funds of funds, credit, forex, long/short equities, or property.”

So how does Downey propose tackling some of the strategies that have been giving his competitors sleepless nights recently? He sees LaSalle being closely involved with its clients, to the extent of appointing seasoned account managers who can work with funds to ensure the correct procedures are put in place to ensure accurate valuations. At this stage, one gets the impression LaSalle will go the extra mile to win business and make sure the integration of new clients goes as smoothly as possible.

“We want to include their tech guys [in the discussion],” says Downey. “We want to get to know their systems, the way they want to automate things. We’re prepared to invest a bit up front to ensure that everything runs smoothly.”

“We think we’re pretty unique – there aren’t that many administrators in Jersey”

For instance, with new client Cairn Capital, a multi-billion dollar manager of credit structures, including a structured credit fund and a loan opportunities fund, LaSalle carried out an extensive review of the firm’s middle and back office systems, and looked at what was involved in the trading of its portfolios. It is from this level of high touch client relationsthat stems Downey’s confidence that his team will be able to cope with the more sophisticated strategy, and turn around valuations more speedily than the competition.

Another advantage LaSalle enjoys is the fact that it is a late entrant. This has enabled it to choose up to date systems that its management consider will be equal to the challenge. The ability to build the infrastructure from the ground up, and tailor it to today’s accounting challenges, not those of the 1990s, is likely to confer something of an edge for Downey’s team. “We’ve been given the opportunity to invest in the systems we want,” he says.

“This will allow us to offer a quicker turnaround time, as we won’t have to keep sending data back to a central depository. Funds dealing with the very established players may be finding they will be having to fit into an established service model, whereas we have the ability to offer [clients] a niche level of customisation and service, coupled with the ability to invest in the latest systems. I’m not sure anyone else out there has that mix, especially when it comes to resourcing the technology.”

But LaSalle has chosen to open its doors in Dublin, a notoriously expensive and highly competitive market right now. Many hedge funds have been complaining over the last 12 months about the high levels of staff turnover in Dublin, and the fact that they are being saddled with inexperienced personnel who have been promoted too quickly, and don’t understand the intricacies of their portfolios. Can LaSalle really promise that it will be different for their clients? Downey reckons that administrators can still hang onto their mission critical staff without having to promise them the earth, and points to the relatively low turnover in his previous management position at Fortis. “You have to give people the opportunity to get involved,” he says. “They have to feel they have sufficient influence to get things done. I’ve always believed in developing the people within the business, and avoiding the over-reliance on extended working hours that prevails in some parts of the industry. I’m keen that my people get the opportunity to get out the door in time.”

With 14 staff in Dublin and two more in Jersey, LaSalle is still a small business, but Downey sees it growing swiftly, and has plans to hire more staff as the operation expands. He emphasises, however, that his expansion scheme has less to do with offering a contract to the next experienced fund accountant that strolls in the door, and more with finding the people who he believes will fit culturally with his existing team. He wants personnel who will remain with the business as it grows. Ultimately, he wants to build a scalable business: he has seen too many examples in the fund administration game of banks throwing people at a problem in the hopes that it will go away, leading to massive, unwieldy, and expensive operations that seem incapable of delivering solid customer service. He doesn’t want LaSalle to go down that road, and has been looking hard at ways to grow the business organically, ensuring fast turnarounds without taking on hundreds of people. Thus, his emphasis on automation, and on implementing the right systems that will ensure service is not compromised. “We’re talking about controlled growth here,” he says. “We’re talking about getting the right people in, at senior levels. We’re talking about client focus. It is important to our organisation that there is consensus about client requirements, so that we can deliver the product on time, and that it is of good quality.”

Independent fund administration wing

LaSalle’s Dublin office is focused on finding new customers in the European market. Although run as an independent arm of Bank of America, Downey says he is looking forward to its BoA parentage helping considerably in getting the firm’s foot in the door to see prospective clients. Stand alone it may be, but when needed, LaSalle can draw upon its parent’s support services in Chicago. Fund administrationis not an esoteric interest for BoA either: Downey is confident that BoA will want to grow this area of the business, and is looking forwards to “exploring potential areas of synergy.”

LaSalle is selling itself on the strength of its expertise with some of the more complex hedge fund portfolios out there, but can any administrator really stand up and say they can produce an NAV they have confidence in, when the only person who can really put a price on some of the securities in the portfolio is the fund’s manager? “The reality is, if a fund is trading very illiquid securities, we will be using estimates based on a model,” says Downey. He thinks the way forwards in these cases is for managers to offer a high degree of transparency to investors, and to include proper governance procedures that cover pricing strategies. It boils down to having the right documents in place, clarity of communication about the assets and how the estimates are being generated, and pre-defined steps that directors and investors can follow to see how the portfolio manager arrived at his estimates. If everyone is on the same page, there is less cause for confusion and recrimination.

Downey likens this to property funds, where portfolios can be notoriously illiquid, and values are frequently based on the estimated worth of the bricks and mortar sitting in the fund. “The manager needs to put in place structures that can cope with complex valuation problems,” he says. “They should be very transparent about their risk statements. We’re strong on independent pricing – it’s not always easy to do, but we go for the closest price that we can procure independently [of the manager].”

On this basis, Downey is still confident his team can find an independent price for virtually any asset type. “We use the same systems and approaches for all assets, even private equity can be done. The systems are automated, including the draw-downs.” With the automation in place, Downey reckons LaSalle will be able to provide hedge fund clients with a much faster turnaround than many may have been used to previously.

Keeping investors happy

The other people fund administrators have been working increasingly hard to keep happy are fund investors. Not only funds of funds, but direct investors as well, are spending more time looking at a fund manager’s service providers than previously. As a new kid on the block, LaSalle is likely to face more scrutiny from those active in the due diligence process who have not come across it previously. Investor audits are becoming more demanding every year, but Downey is confident they’ll like what they see at LaSalle. “We fully expect to have auditors in from the underlying investors, in particular from the institutional investors,” he says. “It’s in our interests that fund managers and their clients are comfortable with what we’re doing here. We want fund investors to be comfortable suggesting our name to other managers.”

Of course, being part of the Bank of America group is a major comfort factor for LaSalle, but Downey is also confident in the team of skilled professionals he has managed to put together, including Barry O’Brien, Director of Regional Business Development, Suzanne Keane, Director of Fund Accounting and Relationship Management, and Operations Director Joanne Gill. With such experience on his team, Downey has found that there has been little for them to learn about the funds LaSalle has taken on to date, leading to fast turnaround times when it comes to getting them launched.

With the market turmoil last year, and in the first quarter this year, one has to wonder whether ebbing investor confidence and the fall-out in the hedge fund sector has slowed business down in the fund administration industry. Downey has not noticed this from where he sits: “The funds are still coming,” he says. “Whether we’re seeing more or less than other people, I don’t know. Funds are maybe taking a bit longer to get launched, but the funds we’re seeing being launched now may have beendelayed by the credit crunch last summer. Still, I get the feeling that investors are coming back again.”

The Jersey connection

LaSalle’s decision to site an office in Jersey at a relatively early stage in its development could prove to be a far-sighted one. Downey says it was the jurisdiction’s growing favour with his clients, particularly those in the CDO and ABS game, and their migration from SPVs into more conventional structures, that argued in favour of a Jersey presence. LaSalle has also been building its expertise in administering property funds, and Jersey has been one of the favoured offshore jurisdictions for real estate managers for some time now. The firm recently won a mandate from a well known property manager which it declined to name publicly.

LaSalle’s decision to site an office in Jersey at a relatively early stage in its development could prove to be a far-sighted one. Downey says it was the jurisdiction’s growing favour with his clients, particularly those in the CDO and ABS game, and their migration from SPVs into more conventional structures, that argued in favour of a Jersey presence. LaSalle has also been building its expertise in administering property funds, and Jersey has been one of the favoured offshore jurisdictions for real estate managers for some time now. The firm recently won a mandate from a well known property manager which it declined to name publicly.

“We think we’re pretty unique,” Downey says. “There aren’t that many administrators in Jersey and Ireland that can handle complex hedge funds.”

Not drowning but waving

At a time when there has been speculation that the boutique hedge fund administrator is a dying breed, when the pioneers of the industry are selling out to the large securities services players that are looking to bring brand and scale to what has traditionally been a much cosier, more personalised business, it is refreshing to see a formula that addresses, on the one hand, a need for high touch, customer-focused accounting, coupled with the systems technology and institutional support that more hedge funds are requiring today.

LaSalle is neatly positioning itself in the space between those smaller outfits that are grappling with tight budgets and ageing infrastructure, and the bigger players who seem, in many cases, to have lost touch with customer priorities in their pursuit of the largest accounts available. A newcomer, it is offering brand new technology coupled with experienced staff and the size that means customers can still expect a high level of service. And for investors, it has an institutional-grade parent behind it that has not compromised the way it is managing its day-to-day client relations. LaSalle may be a relative newcomer, but with the formula it has put in place, it should appeal to a wide range of managers who are less than happy with their current back office arrangements.