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Risk Vs. Cost: How Hedge Fund Managers Can Engage The Right Mix Of Internal, Outside And Shadow Administration

Risk Vs. Cost: How Hedge Fund Managers Can Engage The Right Mix Of Internal, Outside And Shadow Administration by New York Hedge Fund Roundtable

Risk vs. cost

Hedge Funds are back. Total assets under management (AUM) have strongly recovered and are already higher than they were in 2007. In addition, many new funds are launching, particularly smaller managers with AUM of under $100 million. At the same time, managers are feeling pressure to cut fees, while compliance and regulatory costs continue to increase dramatically—and could rise by as much as 20% over the next three years.

A real opportunity to manage costs

Emerging funds are looking closely at how best to meet regulatory requirements without overspending. Top of mind: fund administrative costs. For efficiency, most funds engage a third-party administrator to manage and maintain all or part of their books and records, while also keeping in-house resources to shadow the outside resources. Because of the expense of duplicating these tasks, each fund must make a decision as to where they fall on the spectrum of cost versus risk when engaging the right mix of resources.

“Large multibillion-dollar hedge funds often use a different model, which includes both an outside administrator and a full in-house shadow function that completely duplicates the outside administrator’s work,” comments Michael Patanella, National Asset Management Sector Leader. “Although much costlier, the resulting risk reduction means this is a trade-off they are willing to make.”

Says Kristin Castellanos, global head of product management at Deutsche Bank...


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