Phil Griffiths of JP Fund Administration (Cayman) explains the considerations to keep in mind when establishing a fund in the Latam region.

In the alternative investment community, much of the regulatory and investor focus is now on the use of independent service providers: directors, banks, brokers, auditors and administrators. This focus is hardly surprising given recent scandals.

Although Madoff and other fraudsters were not running hedge funds or other alternative investment structures (Luxembourg Ucits were used), the practice of receiving investor funds into company accounts, executing trades through a proprietary brokerage, reporting all activities and client holding values internally and using a 'friendly' auditor to sign off enabled the perpetration of massive fraud; all industry participants are understandably cautious. The days of the investment manager faxing the NAV to the administrator at the end of the month are long over.

Alternative investment fund structures with independent service providers can be combined to establish cost and operationally efficient funds with the strongest of investor protection characteristics 'built in'.

The JP Funds Group Emerging Managers Platform provides a fund structure that is independently held from the investment manager with independent directors, administration and external auditors to ensure that investors' interests are overseen by separate directors who are not the same as or appointed by the principals of the investment manager.

When establishing a fund, the domicile of investors and their preferences will play a large role, although the manager is the one that must deliver performance, so legal considerations, costs and the flexibility to operate the strategy as intended are key. For these reasons, the vast majority of qualified investor funds are based in the Cayman Islands.

When choosing a fund administrator, similar considerations exist given that this service provider is a key interface with investors and the primary focus of non-investment based activity. Alternative fund managers may wish to consider a number of factors when choosing fund administrator:

  • Regulatory status of administrator

    In many jurisdictions, administrators are simply not accountable to any regulator. A Cayman licensed administrator is subject to the highest minimum capitalisation requirements and comparable regulatory inspection requirements to the strictest EU jurisdictions. Regulation of the fund administrator is a crucial comfort for all fund participants. It's important to note that in recognition of the higher regulatory status of the fund administrator, a Cayman 'administered' fund can accept subscriptions below the usual $100,000 minimums where unregulated administrators are used; some qualified investors may find this very attractive, particularly in the current economic climate.
  • How NAV calculation and reporting is handled

    What is their relationship with third-party providers (for example, banks and brokers)? Can any regulatory or tax reporting be arranged? Do they assist with audit preparation and liaison with other service professionals? Do they really understand the strategy?
  • Operational

    What are the due diligence, anti-money laundering and "know-your-client" procedures like? Are the share registry services adequately covered? Do they actively participate in middle office functions and cash management?
  • IT/disaster recovery

    Are IT backup and disaster recovery systems satisfactory? Can business resume without materially affecting the fund operations and reporting?
  • Fund domicile expertise

    Different jurisdictions have different regulatory and compliance requirements; an administrator will need to be conversant with the requirements concerning the domicile of the fund; and
  • Cost

    Administration fees and sometimes numerous additional charges can have a considerable impact on the ongoing running costs of a fund; ask questions to confirm minimum fees.

While this list is not exhaustive, it provides an initial framework for an investment manager seeking a fund administrator.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.