Evolving reporting/valuations in $2.8trn fund admin survey

Hedge Funds Review's Alternative Administration Survey finds AIFMD reporting and valuation processes are evolving, while national regulator validation checks are said to be neither uniform nor consistent with Esma specifications

August 25, 2015: Updates with expanded results from Custody Risk's Alternative Administration survey

Click here for an expanded version of this survey (PDF)

Fund administrators have adjusted the quantum of controls performed on valuations before they are released to clients as a result of the introduction of the alternative investment fund managers directive (AIFMD), while Annex IV reporting processes continue to evolve, according to Hedge Funds Review's Alternative Administration Survey.

The survey also found healthy increases in hedge fund assets under administration with most respondents reporting double-digit percentage growth. Administrators servicing a total of $2.8 trillion in hedge fund assets responded to the survey.

Most respondents said their organisations had adjusted their Annex IV reporting completion process following the first filing and this would require fine-tuning over time. The UK Financial Conduct Authority came in for criticism when its online reporting system Gabriel crashed at the start of the year.

BNY Mellon says its core Annex IV reporting process is in place and operational but is expected to be refined to improve efficiency, while RBC Investor & Treasury Services has changed several fields in the extracts sent to investment managers following the first filing.

Administrators agree that Annex IV reporting solutions are in a state of evolution. SS&C GlobeOp found that national competent authorities' validation checks were not uniform and not necessarily consistent with specifications from the European Securities and Markets Authority. It has therefore had to compile jurisdictional divergence intelligence and incorporate it into its software. Likewise, SEI says is continuing to build out requirements as new jurisdictions implement the requirements and as new online system requirements are provided.

Concurring, Citco says its infrastructure continues to be updated to include additional guidance, country-specific validations and industry best practices "as they are promulgated". It intends to add new functionality and process outputs specific to the needs of filers and the various EU national competent authorities they report to.

Increased controls

In terms of valuations under AIFMD, some administrators say the requirements have caused them to increase the quantum of controls they perform.

RBC Investor & Treasury Services says it has increased controls on relative performance against benchmarks, share class performance variations and large mover reports.

Citco says it already had robust controls in place pre-AIFMD, but with the increased focus on valuations it further strengthened the layers of controls and tightened the requirements that need to be met per instrument before it can act as an external valuer. Post-AIFMD, it is paying a lot more attention to the number of independent sources of prices for each instrument.

Under AIFMD, the manager is responsible for the valuation of the assets and the administrator is required to apply the valuation policy of the fund to independently verify the value of the underlying assets. Reflecting responses in last year's survey, most administrators do not provide support for valuation services to act as an external valuer under AIFMD and the few that do typically only do so for Level 1 and Level 2 instruments.

Administrators are guided principally by each fund's valuation policy, including the policy described in the offering documents, to confirm the valuation used for Level 3 hard-to-value (HTV) assets or liabilities in the calculation of the net asset value (NAV) of the fund.

BNY Mellon says it establishes a pricing matrix at the onset of any client relationship specifying primary, secondary and tertiary sources based on security type and this document includes pricing logic.

BNY Mellon operates a centralised pricing utility to obtain prices for all funds' securities via automatic data feeds from external pricing vendors and brokers on a daily or intra-day basis. For securities whose prices are not provided by vendors, it obtains manual prices from brokers and market makers identified by the investment manager. It will then request its primary sources to add the security to their pricing list.

SS&C GlobeOp says that if it is unable to independently confirm the value of an HTV investment, a written valuation instruction is required from an authorised employee of the manager or from the fund's governing entity. Disclosures on investor statements are often required where HTV assets constitute a material portion of a fund's NAV. SS&C GlobeOp confirms it has seen disputes between managers and counterparties over the value of illiquid instruments.

The treatment and classification of an illiquid trade is defined within the context of the valuation policy document. Tolerance thresholds are established for the purpose of reasonableness testing and any trades – illiquid or not – breaching these levels are escalated as per the criteria listed in the valuation policy for instruction or confirmation by the manager. SS&C GlobeOp says that where an asset previously priced is now considered illiquid due to prevailing market events, the manager may be asked to provide written documentation of the rationale and any other supporting information to override the original price as per the valuation policy.

Citco says its risk and valuation team has members specialising in Level 3 valuations. Typically Citco reviews the valuation process being followed for HTVs and ensures the approach is signed off by the fund valuation committee and is consistently followed in each valuation cycle. Citco reviews the inputs driving valuation, checks if the framework used captures the full economics of the trade and ensures valuations are being performed in line with the pricing policy of the fund.