One step forward and two step backward: Hedge Fund valuation

According to the WallStreet Journal, GlobOp Financial Services, a provider of administration services to hedge funds, has settled claims it misvalued the assets of a collapsed London hedge fund.

GlobeOp agreed to pay Regents Park Capital Management, which imploded in 2006, US$43.5 million to put to rest Regents Park’s claims about GlobeOp’s calculation of the funds’ value and “the impact on that of mispriced position values provided by a principal of the hedge fund’s investment manager,” the administrator said in a statement. By making a deal, GlobeOp avoids going to arbitration with Regents Park, which was seeking US$109 million in damages.

According to the Q4 2008 survey of hedge fund administrators performed by HedgeFund.Net, GlobOp had $95b of assets under administration for around 1127 individual funds.
This is not the first time GlobOp has faced claims for failing to correctly value a fund’s net asset value. The previous case was concerning the Archeus fund in 2006. New York-based Archeus, whose assets shrank from $3 billion in May 2005 to about $700 million by October 2006, blamed GlobeOp for "colossal failures" in reconciling billions of dollars in trades in the Animi funds that were managed by Archeus. The suit, filed in New York State Supreme Court, seeks at least $465 million in damages. The two parties reached an amicable settlement of the claim in July 2007. The terms of the settlement were not disclosed.

In the light of those two stories, it is not surprising to see administrators trying to reduce their liabilities in regards to assets valuation. In several instances, also the administrator is doing is own valuation of a fund’s portfolio, the administrator prefers to limit its role to the verification of the NAV rather than the actual valuation. Ultimately, if the administrator is not responsible for the pricing the level of independent oversight is sharply diminished to the detriment of the shareholders protection. Instead of driving the service quality upward, the very competitive administration industry is driving the prices so low that the administrators have to rationalize their operations to remain profitable. On average the administration fee is usually representing 12bp of a fund’s assets. I am sure that shareholders will be more than happy to pay 25bp to the administrator in exchange for a top quality service which will provide them with the necessary transparency and protection.

The fee debate in the hedge fund industry should include not only the remuneration paid to the investment managers but also the fees paid to the other service providers. The goal for investors should not be to pay less but to pay the right price for a service of quality.