Fundamentals of Fund Administration: A Guide (Elsevier Finance) PDF
Preview Fundamentals of Fund Administration: A Guide (Elsevier Finance)
Fundamentals of Fund Administration: A Guide This page intentionally left blank Fundamentals of Fund Administration: A Guide A Complete Guide from Fund Set Up to Settlement and Beyond David Loader Amsterdam•Boston•Heidelberg•London NewYork•Oxford•Paris•SanDiego SanFrancisco•Singapore•Sydney•Tokyo Butterworth-HeinemannisanimprintofElsevier Butterworth-HeinemannisanimprintofElsevier LinacreHouse,JordanHill,OxfordOX28DP,UK 30CorporateDrive,Suite400,Burlington,MA01803,USA Firstedition2007 Copyright©2007,ElsevierLtd.Allrightsreserved Nopartofthispublicationmaybereproduced,storedinaretrievalsystem ortransmittedinanyformorbyanymeanselectronic,mechanical,photocopying, recordingorotherwisewithoutthepriorwrittenpermissionofthepublisher PermissionsmaybesoughtdirectlyfromElsevier’sScience&TechnologyRights DepartmentinOxford,UK:phone(+44)(0)1865843830;fax(+44)(0)1865853333; email:permissions@elsevier.com.Alternativelyyoucansubmityourrequestonlineby visitingtheElsevierwebsiteathttp://elsevier.com/locate/permissions,andselecting ObtainingpermissiontouseElseviermaterial Notice Noresponsibilityisassumedbythepublisherforanyinjuryand/ordamageto personsorpropertyasamatterofproductsliability,negligenceorotherwise, orfromanyuseoroperationofanymethods,products,instructionsor ideascontainedinthematerialherein.Becauseofrapidadvancesinthe medicalsciences,inparticular,independentverificationofdiagnosesand drugdosagesshouldbemade BritishLibraryCataloguinginPublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary LibraryofCongressCataloging-in-PublicationData AcatalogrecordforthisbookisavailablefromtheLibraryofCongress ISBN-13:978-0-7506-6798-2 ISBN-10:0-7506-6798-2 ForinformationonallButterworth-Heinemannpublications visitourwebsiteatbooks.elsevier.com TypesetbyIntegraSoftwareServicesPvt.Ltd,Pondicherry,India www.integra-india.com PrintedandboundinMPGBooksLtd.Bodmin,Cornwall 07 08 09 10 11 10 9 8 7 6 5 4 3 2 1 Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org Contents INTRODUCTION 1 1 UNDERSTANDING THE INVESTMENT ENVIRONMENT 5 Investment funds 5 Structure of funds 7 Investment company 9 Authorised and unauthorised funds 9 Onshore and offshore funds 10 Portfolio investment 10 Markets and investments 12 Investment drivers 18 Products and assets used in portfolio management 32 2 HEDGE FUNDS 33 Market neutral (or relative value) funds 34 Long/short funds 34 Tactical trading 34 Global asset allocation funds 34 Event-driven funds 35 Short-selling funds 35 Arbitrage funds 35 Tax issues 37 Regulatory issues 38 Business issues 39 Investment issues 40 Marketing issues 40 Operational issues 41 Defining responsibilities 42 Fund set-up summary 43 vi Contents 3 MUTUAL FUNDS AND OEICs 45 Background 45 OEICs 46 Dilution levy 46 Share classes 46 Currency class shares 47 Different rights 47 Advantages over unit trusts 48 Hedge vs mutual funds: A comparison 48 4 PRIVATE EQUITY 51 Definition of carried interest 52 Venture capital funds 53 Fund administration 55 5 UNIT TRUSTS 57 Origins of the unit trust 57 Buying and selling units 58 Charges 58 6 THE ROLE OF THE FUND ADMINISTRATOR 61 Reconciliation 62 Administration workflow 62 Hedge fund administration 64 Structure 65 Global reach and location 66 Business considerations 66 Technology 67 Fees 68 Fund launches 69 Accounting 70 Compliance services 70 Summary 71 7 PORTFOLIO ADMINISTRATION 73 Assets of the fund 74 Margin and collateral 76 Asset trades 76 Income and entitlements 77 Unmatched transactions 80 Unsettled transactions 81 Claims 81 Contents vii 8 NAV, PRICING AND VALUATIONS 83 Pricing of funds 85 Hedge fund pricing 86 Pricing assets 87 Pricing controls 87 Equalisation 89 Summary 91 Glossary of fund administration terms 93 Useful websites and suggested further reading 171 Appendix 1 173 Appendix 2 177 Index 207 This page intentionally left blank Introduction Many funds have decided to concentrate on their role as investment managersandhaveelectedtooutsourceasmuchoftheadditionalwork structure, particularly operational work. Also the “newer” funds like hedge funds are structured in such a way that the support roles like custody and administration tend to be handled by specialist organisa- tions, prime brokers and fund administrators. These roles are important as in reducing almost completely the need forthe“fundmanager”,inthissensethesponsor/owner,tobeinvolved in anything but investment decision-making; and the setting up of new hedge funds is made staggeringly easy. This may go some way in explaining the significant growth in these funds in recent years (hedge funds are not a new phenomena). However, fund administration has evolved from a relatively humble beginning where the primary role was that of calculating the value of the assets in the fund so that a price for the investors wanting to buy or sell shares or units in the fund could be established. Today a fund administrator may have roles related to everything from setting up the fund to risk management and compliance roles. The administrator is verymuchmonitoringthefundtoensurethattheactionsoftheinvest- mentmanagerareinlinewiththeobjectivesofthefund,theregulatory environmentapplicabletothefund,thetaxsituationaffectingthefund and the client service role between the fund and its investors. As a result some of the functions previously carried out by specialist firms have been absorbed into the fund administration role, particu- larlywithinthelargerfundadministrators.Transferagency/fundregis- trar services for instance are provided as part of fund administration services by some companies. However specialists can and do survive, providing bespoke services to their clients. In some ways the fund administration business has evolved in a similar way to custody services. Consolidation, expanding range of
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