Friday, 7 January 2011

The trend towards Liability Caps at some Hedge Fund Administrators.

An interesting new development within the Hedge Fund industry concerns the increasing use of Liability Caps by Fund Administrators. Hedge Fund Administrators particularly are starting to follow the lead set by many auditors a number of years ago and placing a cap on their potential liability within their Administration agreements in the case of incorrect NAV calculation.

The implications for this for the Investment Manager could be quite significant. Essentially they are made far more accountable for the correct valuation of the Fund’s NAV. To ensure this is done accurately will require significant investment in adequate operational systems, resources and controls.

And this goes back to another point I’d heard recently – the increasing requirement by many institutional investors to have a full separate general ledger – independent of their administrator. This is a big change because many existing “shadow” fund accounting systems are not and where not built to have this level of functionality. This is likely to increase pressure on the industries software vendors to ramp up the accounting functionality of their software.    

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