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Research Paper - The recent economic meltdown that...

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The recent economic meltdown that triggered financial markets across the globe to plummet brought an influx of unprecedented media attention to the fund industry. Investment banks such as Goldman Sachs, Citibank and Lehman Brothers were heavily criticized for their irresponsible monetary policies. However, this shift towards the financial world sustaining mainstream headlines failed to highlight one of the biggest markets players in funds: the hedge fund administration industry. This trillion-dollar service field remains the backbone of nearly all successful hedge funds and yet fails to gain the notoriety of other more lucrative businesses. In fact, new interest in financial regulation has created greater demand for third-party administrators and paved the way for the success of such companies. Hedge fund administration may not generate the national interest that much of the financial world does, however these businesses make up a significant portion of the day-to-day operations within today’s funds. The complexity within the portfolios of hedge fund managers as well as the market- leading returns generated for high net worth individuals has created market to cope with the administrative side of operations. But what is this business practice whose assets under management surpassed $2 trillion in 2009? 1 Typically administrators deal with most day-to-day or “back-room” activities of hedge funds, barring any investment decisions. These services include maintaining the hedge fund’s accounts and other financial records, acting as liaison with the hedge fund’s custodian bank, auditing, as well as anti-money laundering checks on investors. The extent of the administrators duties are typically outlined in an administration agreement which includes terms such as termination fees and liability expenses. 2 Administrators play a pivotal role in the functionality of hedge funds. Udit Gambhir, Director of Transaction Banking at Standard Chartered Bank, explains that a typical hedge fund administrator is split into two parts, being fund accounting and the registrar and transfer agent. “Fund accounting is the actual accounting for all activity within a fund: cash flows, portfolios/investments; income/expense accruals; fee calculations; and return allocations.” A fund accountant essentially brings the accounts up-to-date up to and when reporting occurs and ensures that prices are tied out independently to an external source of market data such as 1 McVea, Hany. 2008. "Hedge fund administrators and asset valuations - does it all add up?." Journal of Financial 16, no. 2: 130-141. Business Source Complete , EBSCO host (accessed June 10, 2011). 2 McVea, Hany. 2008. "Hedge fund administrators and asset valuations - does it all add up?."
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This note was uploaded on 02/06/2012 for the course ECONOMICS EC497 taught by Professor Plescia during the Spring '11 term at BU.

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Research Paper - The recent economic meltdown that...

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