NAV Light?

The hedge fund administrator plays a critical role when thinking of the operational risk of hedge funds. One of the biggest lessons from our due diligence experience, though, is that not all administration servicing is created equal.

We will return to the question of the role and responsibility of the administrator regularly, but wanted to touch today on one of our favorite bugbears - NAV Light.

In a NAV Light, the administrator does not make any effort to account for a hedge fund's trades and keeps no accounting records themselves. What the admin will do, however, is perform some type of check on the NAV previously calculated by the hedge fund manager.

The snag is that checking someone else's work is obviously not the same as doing the work yourself. The only way to properly account for a hedge fund is actually to do the accounting: good, old fashioned debits and credits to track each trade.

Adding to the confusion is the complete lack of any agreed standard as to the checks an administrator should perform. Does the admin check the positions to prime broker statements to confirm that the month end assets actually exist? Do they check the prices? If so, how? Some administrators do quite a lot of work - some do virtually nothing.

It's hard to see NAV Light as anything more than an unsatisfactory half way house. Why bother at all, then? The cynical - and largely true - answer is that NAV Light lets the manager tick the box to say they have an administrator. At least some investors will take false comfort, not realising that the admin is doing much less work than they could - or should.

We are encouraged that at least one of the leading administration firms has exited the NAV Light business. We hope the others do too - let's not forget that it's the investors, not hedge fund managers, who pay the administrators' fees. If we're going to pay, we'd rather pay for someone to do a proper job.

Comments

[Jeanmarie]

Agreed,
However, I think Citco is still not up to par since the trades are entered by the client. however they do received all trades confirmation end of month but in reality I don't even think they check if the trades confirmation matches with the trades on the system and also the brokers sometimes only confirm month end positions and not the trades themselves.