Nottingham CEO WitnessTo Greater Transparency, Lower Hedge Fund Fees
October 25, 2010
Nottingham Investment Administration is one of the few fund administration companies that offers highly responsive, customized accounting and reporting solutions for smaller pools of assets. As such, since 1989, Nottingham has been in the unique position to spot trends and have direct knowledge of the top concerns of the 200 mutual fund, hedge fund and separately managed account portfolios it services.
Kip Meadows, chief executive officer and founder of Nottingham Investment Administration, headquartered in Rocky Mount, N.C., recently spoke with Money Management Executive about the impacts of the Dodd-Frank bill, tremendous commercial real estate opportunities and the new transparency hedge funds are embracing, even to the point of issuing daily net asset valuation.
MME: Do you have a broad focus at Nottingham Investment Administration, and as such, does that give you insight into some of the larger trends in fund administration?
Kip Meadows: We focus mostly on mutual funds, hedge funds, foundations, endowments, government investment pools and separately managed accounts.
One of the things we are seeing is whereas five years ago, if an investment advisor wanted to set up a pooled vehicle, they would almost automatically decide to go to a hedge fund model so that it would not be registered under the 33 Act and be limited to accredited investors, and so forth.
Those same advisors are calling us now, and saying they are not exactly sure what type of vehicle they want to set up, that while they may originally have thought they wanted to establish a hedge fund, with all the talk of regulations, they aren't sure how those regulations will end up shaking out, with so much of the potential regulation delegated to the agencies-hedge funds might end up being almost as regulated as mutual funds, and so, they might be more interested in setting up a 40Act mutual fund instead.
We started out 21 years ago, back in the late 1980s doing nothing but 40 Act mutual funds, and then it became 50/50 in the mid to late 1990s as hedge funds became more accepted in the investment world. Five years ago, before the financial crisis of 2008, the inquiries were probably more 75% or 80% for hedge funds and only a few for mutual funds. Then, after the Bernie Madoff and Allen Stanford scandals and arrests, and the Dodd-Frank bill and Congressmen wanting to show their constituents how diligent they are, it has swung back.
Most of the calls we get now are inquires about what is the most appropriate vehicle for them now.
Q: What do you normally recommend now in light of the Dodd-Frank bill?
Meadows: Well, it actually depends. We try to take a consultative approach. You learn more by asking questions than by talking. We'll ask them who their target market is. Where do they expect to raise money for their fund?
If it's mostly high-net-worth individuals or institutional money, then a hedge fund might be the perfect vehicle. But if they want to be able to offer the product as an option in a 401(k), that is very difficult to fit a hedge fund into unless the 401(k) plan document allows for non-registered investment funds. It would be expensive and time consuming, so a mutual fund would be a much better vehicle.
Or if they've got a broker who liks to refer business to them, but the average account size is below the hedge fund minimum, only $50,000 or $100,000, then a mutual fund is ideal.
Q: Are you finding that institutions and endowments are looking for the transparency of a registered fund?
Meadows: We do hear stories about this, and here is a very typical example. In that same time period of 2005 to 2008 when the markets were just go, go, go, many investment advisers were leaving large brokerage firms to start their own fund. It wasn't hard for even a 26-year-old Wall Streeter to raise $50 million.
Well, now what we hear is, "In order for me to raise money for this new fund, I have got to have a third-party administrator involved." A lot of hedge funds did their own accounting and didn't necessarily get it audited. Now that is unheard of, because investors want to avoid another Madoff situation at all costs. They are telling asset managers, "You've got to have a second set of eyes involved, and the fund needs to be audited." It's becoming a given.
Q: Where does Nottingham Investment Administration come in with some of these services?
Meadows: We calculate the market value of the portfolio, whether it be monthly or quarterly, and in fact we are seeing quarterly valuations become a little bit more rare, as well. And a lot of hedge funds want to go to daily valuations or weekly.