Unfortunately, it is very easy to get trapped in a wrong choice of partnership, for many reasons. If the selection is done superficially, as is often the case, it will most probably lead to additional headaches, i.e. exactly the opposite of the original goal. As usual, the devil is in the detail!

Pitfall #1: Regulatory Risk Reporting

These requirements are quite heavy for all types of funds, including financial and alternative funds. Other than the independence of roles, the reporting requirements are usually very time consuming, as regulations keep evolving.

It often makes sense to seek the assistance of an external specialist to take care of the above. But, frequently, this road is filled with various obstacles:

• The external service provider will need raw data from the fund, usually via its administrator. He will be completely responsible for his own calculations, assuming all given data are accurate and complete. So the following should be assessed: How cooperative will the administrator be in providing such data in a timely and reliable manner? What types of reconciliation checks will the service provider perform and how exhaustive will these checks be? What happens if discrepancies arise? Will he also perform reasonability tests, for example regarding important changes in positions and risk measures?
• Some Risk reporting service providers often expect to receive all intermediate risk calculations from the fund itself, limiting their function to complying with the format of such reporting, for example the “XML” type of files which are now quite typical among regulators. If that is the case, who will calculate figures like Value-at-Risk and various sensitivity coefficients required for financial assets? Who will perform the stress-testing exercises required for all types of funds?
• In cases where the service provider will assume responsibility for these calculations, what technology is he going to use? Is it an in-house system or an external one? What are the capabilities of the underlying system?
• Finally, given all the work and cost involved in feeding and running an external system for regulatory purposes, it would be a good idea to leverage this for internal risk & portfolio management purposes, for example by producing useful dashboards and reports. Before you make your choice you need to know if/ how this is possible, at what cost.

Pitfall #2: Fund administration

A fund administrator is typically selected on the grounds of general reputation and competitive pricing. However, you should consider the administrator’s specific experience not only in the asset classes you currently have in your portfolio, but also in those you might be dealing with in the future. Financial derivatives and illiquid/ alternative asset classes often pose problems when they appear, in small or larger volumes, in a portfolio.

The technology the administrator uses, as well as how this technology is made available to its customers is yet another frequently underestimated topic. Among others, technology is key for reconciliation and integration with your other systems. Most administrators deliver PDF reports to fund managers in order for them to check and approve. Electronic delivery of information is not an option, particularly for smaller customers. Such information cannot be easily imported to other systems that a customer might be using, rendering the reconciliation process very cumbersome, and at the same time leaving some aspects, such as fees calculations, typically unchecked.

To overcome this problem, some vendors offer recognition of PDF reports and attempt to interpret numbers as such instead of as-images. Although this technique can be quite useful in importing and verifying large quantities of text, it is clearly a sub-optimal solution when it comes to interpreting financial statements, as it is open to many types of mistakes.

On other situations where electronic reporting is stated as an option, one still needs to be careful as these files often lack documentation and leave the user to interpret various codified fields, while duplicate or cancelled transactions might be present either by mistake or due to misinterpreted coding.

In our opinion, administrators capable of delivering reliable electronic information should be preferred, assuming, of course, that they fulfill other more obvious criteria too. As this is often provided at an extra cost, it is best for such a negotiation to take place before the on-boarding process.

Pitfall #3: Know Your Customer (KYC)/ Anti-Money Laundering (AML) process

Knowing your customer is a regulated process with heavy implications in case of wrong doing. The fund manager carries the ultimate responsibility while usually an external Transfer Agent, typically an isolated department of the fund administrator, assumes the responsibility for the communication with investors. The KYC process involves gathering a large number of documents from every investor, and checking with systems. But too much manual processing leads to mistakes, so here are some questions to ask yourself:

• How does my own Transfer Agent implement the KYC process? Is it a manual process involving exchange of email and correspondence or an electronic communication enforcing various check points, including the collection and the safekeeping of the relevant documents?
• To what extent is the following of a prescribed workflow with all involved steps guaranteed? Is there a modern system behind this, which is safeguarding the robustness and the efficiency of the entire process, or is it done in the “old fashioned” way?