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Fund administration is the name given to the execution of back-office activities including
fund accounting Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law.Leon E. Hay (1980). ''Accounting for Governmental and Non ...
,
financial reporting Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
,
net asset value Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exc ...
calculation,
capital call A capital call (also known as a draw down or a capital commitment) is a legal right of an investment firm or an insurance firm to demand a portion of the money promised to it by an investor. A capital call fund would be the money that had been c ...
s, distributions, investor communications and other functions carried out in support of an
investment fund An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages in ...
, which may take the form of a traditional
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...
, a
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
, a
private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a typ ...
fund, a
venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
fund, a
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...
, a
unit trust A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending ...
, or other pooled investment vehicle. Managers of funds often choose to outsource some or all of these activities to external specialist companies, such as the fund's
custodian bank A custodian bank, or simply custodian, is a specialized financial institution responsible for providing securities services. It safeguards assets of asset managers, insurance companies, hedge funds, and is not engaged in "traditional" commercial ...
or
transfer agent A stock transfer agent, transfer agent, share registry or transfer agency is an entity, usually a third party firm unrelated to security transactions, that manages the change in ownership of company stock or investment fund shares, maintains a r ...
. These companies are known as fund administrators.


Calculation of NAV, and other administrator activities

These administrative activities may include the following administrative functions, which may include "fund accounting" functions. Some of these items may be specific to fund operations in the US, and some pertain only whether the fund is an SEC-registered fund: *Calculation of the
net asset value Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exc ...
("NAV"), including the calculation of the fund's income and expense accruals and the pricing of securities at current market value, is a core administrator task, because it is the price at which investors buy and sell shares in the fund.''Guide to Sound Practices for Hedge Fund Administrators''
/ref> This involves trade capture; security valuation (for highly illiquid securities, considerations include whether counterparty valuations are available and/or appropriate and whether the securities can be valued by independent vendors);
reconciliation Reconciliation or reconcile may refer to: Accounting * Reconciliation (accounting) Arts, entertainment, and media Sculpture * ''Reconciliation'' (Josefina de Vasconcellos sculpture), a sculpture by Josefina de Vasconcellos in Coventry Cathedr ...
s;
expense An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition ...
calculation; and NAV calculation and reporting. The accurate and timely calculation of NAV by the administrator is vital."Sound Practice Guidelines for Administrators of Alternative Funds including Experienced Investor Funds in the Isle of Man"
/ref> *Preparation of semi-annual and
annual report An annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance. ...
s to shareholders *Maintenance and filing of the fund's financial books and records as the fund accountant, including reconcilement of holdings with custody and
broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be con ...
records *Payment of fund expenses *Settlement of daily purchases and sales of securities, ensuring collection of dividends and interests *Calculation and payment to the
transfer agent A stock transfer agent, transfer agent, share registry or transfer agency is an entity, usually a third party firm unrelated to security transactions, that manages the change in ownership of company stock or investment fund shares, maintains a r ...
of
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-inv ...
s and distributions (if required) *Preparation and filing of the fund's prospectus *Preparation and filing of other SEC filings/reports *Calculation of the total returns and other performance measures of the fund *Monitoring investment compliance with SEC, prospectus or
U.S. Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
restrictions *Supervision of the orderly
liquidation Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistr ...
and dissolution of the fund (if required) This list is not exhaustive, and particularly where a fund manager has chosen to outsource some of these tasks to an external company, some or all of the administrative activities of the fund may or may not be described as "fund administration". Specific activities that definitely do not fall under fund administration are those directly associated with the marketing and development of a collective investment scheme: *Gathering assets (i.e., seeking additional investors into the fund) *Asset management (i.e., deciding how to spend the money that investors have put into the fund in order to obtain the best return for that investment) In the view of some fund managers, any task necessary for maintenance of the fund that does not fall into one of the two categories above could be classed as fund administration, and could potentially be a candidate for outsourcing. The ' credit crisis' of the early 2010s had a significant effect on providers of fund administration services.


Fund administrator liability

The case of ''Anwar v. Fairfield Greenwich'' (SDNY) is the major case relating to fund administrator liability for failure to handle its NAV-related obligations properly."The Citco Settlement And What Lies Ahead For PwC,"
Law360.
The case was a consolidated proceeding against defendants that provided auditing and hedge fund administration and management services to investor plaintiffs whose investments were lost in the
Bernard Madoff Bernard Lawrence Madoff ( ; April 29, 1938April 14, 2021) was an American fraudster and financier who was the admitted mastermind of the largest Ponzi scheme in history, worth about $64.8 billion. He was at one time chairman of the NASDAQ ...
Ponzi scheme A Ponzi scheme (, ) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi, the scheme leads victims to believe that profits are comi ...
. Defendants were entities and individuals associated with among others Fairfield Greenwich Group, Citco Group Ltd ("Citco"), and GlobeOp Financial Services. Investors accused the defendants of collecting hundreds of millions of dollars in fees for their services, while ignoring warning signs that should have alerted them to the existence of Madoff’s fraud. Plaintiffs alleged they lost $7.5 billion. The defendants settled in 2016 by paying the ''Anwar'' plaintiffs $235 million. Before the case settled, the court held that although the administration agreements did not explicitly name plaintiff investors as third-party beneficiaries, plaintiffs satisfactorily alleged intent to permit third-party enforcement given that the administration agreements requirement that the Citco defendants render certain specific performance directly to plaintiffs.''Anwar v. Fairfield Greenwich'' (SDNY)
/ref> The court also held that plaintiffs adequately alleged that there was a discrete group of potential investors who were known parties to the Administrators, and that the Administrators intended those investors to rely upon the NAV to invest in the Funds. In addition, the court held that the Administrator sending NAV statements to interested investor parties was sufficient to allege a "linking" requirement. The court held that the case was parallel with ''Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec.'', 592 F. Supp.2d 608, 641 (SDNY 2009), in which
The NAV, which was to be independently calculated and reported by
he Administrators He or HE may refer to: Language * He (pronoun), an English pronoun * He (kana), the romanization of the Japanese kana へ * He (letter), the fifth letter of many Semitic alphabets * He (Cyrillic), a letter of the Cyrillic script called ''He'' in ...
was fundamental to Plaintiffs' initial investment decisions, decisions to invest additional funds, and decisions to maintain the investments over time. The number of shares that the Plaintiffs received in exchange for their investment amounts depended on
he Administrators' He or HE may refer to: Language * He (pronoun), an English pronoun * He (kana), the romanization of the Japanese kana へ * He (letter), the fifth letter of many Semitic alphabets * He (Cyrillic), a letter of the Cyrillic script called ''He'' in ...
NAV calculations. Plaintiffs' subsequent reported profits also turned on
he Administrators' He or HE may refer to: Language * He (pronoun), an English pronoun * He (kana), the romanization of the Japanese kana へ * He (letter), the fifth letter of many Semitic alphabets * He (Cyrillic), a letter of the Cyrillic script called ''He'' in ...
calculations. Therefore, Plaintiffs necessarily relied on
he Administrators' He or HE may refer to: Language * He (pronoun), an English pronoun * He (kana), the romanization of the Japanese kana へ * He (letter), the fifth letter of many Semitic alphabets * He (Cyrillic), a letter of the Cyrillic script called ''He'' in ...
NAV calculations.
The court held further that "As in ''Pension Committee'', ... it is reasonable to infer from Plaintiffs' allegations that the Administrators were aware that Plaintiffs would—and did—rely on their statements of the Funds' NAVs that were sent to the investors.... Accordingly, the Court finds that Plaintiffs allege a relationship between the investors and the Administrators that gives rise to a
duty of care In tort law, a duty of care is a legal obligation that is imposed on an individual, requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be establ ...
...."


See also

* Fund governance *
Investment management Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be instit ...
*
Hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...


References


External links


''Fundamentals of Fund Administration: A Guide''
{{DEFAULTSORT:Fund administration Investment management