Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives

CHAPTER 4

How to Approach Investing in Hedge Funds: Service Providers and Due Diligence

Now that we have outlined the various structures by which an investor can allocate to hedge funds, we'll unpack who supports this process on both sides and why.

MEET THE SERVICE PROVIDERS

Just like every other established industry, hedge funds have service providers or vendors that perform specific, often bulky, and mundane tasks. Hedge fund service providers can range from the expected—lawyers and accountants, to the less well known—hedge fund administrators, technology providers, prime brokers, and auditors that ensure all the trains keep running on time.

Hedge Fund Administrators

Hedge fund administrators can be independent entities like Maples Fund Services that only provide valuations and other strictly administrative support. Or, administrative services can be offered as part of a custodial banking relationship—think Northern Trust or BNY Mellon. Custodial banks typically have control of assets and also engage in tax support functions and other bank-type transactions, whereas an independent entity is going to be solely focused on fund services.

So, what are fund services? Hedge funds require the use of administrators to help them out with several critical functions like providing valuations of the fund itself, or individual assets. Hedge fund administrators are also record keepers providing a record of fund transaction activity to both the manager and the investor. A special relationship ...