Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Who are a Fund's Critical Service Providers?

The four most important service providers are the fund's administrator, prime broker, auditor, and law firm. Collectively, these providers give a manager leverage and access to information and scale; they form a critical part of the control environment and risk management process. Most important, they provide reputational validation simply by their association with the manager. High-quality service providers can extend a manager's reputation, give investors confidence, and have a positive brand effect, in addition to the tangible benefits associated with the actual service being provided. In cases where the service provider is not high quality, a fund suffers a loss of reputation by association. Great care needs to be taken when evaluating service providers or when choosing those that may be high quality but are less known or niche players in their field.

Investors can easily obtain information about a manager's choice of administrator, prime broker, auditor, and legal counsel from any of the fund's promotional or legal documents, such as a pitch book, term sheet, due diligence questionnaire, and offering documents.