Q&A: William Keunen

Director of Fund Services, Citco Fund Services

Originally published in the May 2006 issue

Citco Fund Services has long been recognised as one of the leading providers of fund administration services for the hedge fund fraternity. It now services over 2000 hedge funds from its network of offices around the world, with more than $300 billion in AuM. Citco's Global Director of Fund Services, William Keunen, originally joined Citco in 1987 to run the Quantum Fund account, and returned to the bank after a spell at GAM, to be Managing Director in the Cayman Islands. In 1999, he was instrumental in establishing Citco's Dublin office, which has gone from strength to strength, to form a core part of its hedge fund servicing capability (it opened a new office in Cork in April this year). Keunen was appointed to his current role as Global Director of Fund Services in June 2001.

How did Citco get into this business in the first place?

In the days when US based hedge funds were required to comply with the so-called Ten Commandments, certain activities had to be performed offshore. This resulted in hedge funds seeking reputable offshore service providers such as Citco. As the hedge fund concept spread we opened offices throughout the world to remain close to the hedge fund community and evolved with the industry, so that we now have 14 offices worldwide.

Why base your operation in Curacao?

Citco originated in Curacao at the outset, and although it still has offices located there, it is no longer the base of our operations. In addition to our 14 offices worldwide, our strategic centres are located in New York and Toronto to cover the North American market and Dublin and Amsterdam to cover Europe.

To what would you attribute Citco's leadership in the hedge fund administration market?

A combination of experience and dedication. Citco has been offering fund administration services since 1969 and has had the good fortune to have worked with many of the most high profile, complex hedge funds since their inception. We have learnt a great deal from our clients and in doing so, we hope we have added value to the process.

In addition, as an independent company, fund administration is our core business, it is what we do, so internal discussions about ways to improve the quality of our offering are focused on the fund administration product. Sad as it may seem, fund administration has always been a means to an end for us, not a cross-selling opportunity. We also benefit from a dynamic management environment that is dedicated to preserving our lead in this field by innovating our offering rather than becoming trapped in internal institutional bureaucracy. Hence our decision first to roll out a full front-to-back offering that included front office software for single manager funds in 2002, followed by a similar offering for funds of funds in 2005.

How do you think the industry is being changed by the entry of more large scale banking organisations into the business of hedge fund administration?

The industry is constantly adjusting to new participants, where banking organizations are joined by prime brokers, law firms, even hedge funds themselves considering their options. Overall I am sure that increased competition is positive for the industry and provided that participants focus on core competencies, they will add value in what has become a complex and challenging environment. However, what we have seen to date is that banks entering this space attempt to apply their long only systems and expertise to hedge funds, and they quickly discover that this gives them little scope to really deal with the operational challenges that hedge funds represent – hence their liaisons with existing hedge fund administrators.

This trend also reflects the growing importance of the administration function. One of the primary reasons is that as hedge funds become increasingly complex they start using multiple trading counterparties, with the result that the administrator is the sole counterparty capable both of aggregating a fund's activities and providing independent checks and balances. As such fund administration is considered to be an add-on to other service offerings.

Do you think there will still be a role to play for the boutique offshore administrator?

Absolutely. Anyone who can prove that they are capable of adding value will be able to find a niche. For instance, I am certain that some smaller funds feel that they get more individual attention at fees that make sense for them.

What do you think are the big challenges you will be facing as a service provider over the next few years?

Staffing and knowledge. Hedge funds are becoming increasingly complex through a combination of their investment strategies, the asset classes they use and the structures they establish for their investors. Administrators must have qualified, competent staff to understand instrument flows and valuation principles. On top of that, the competition for knowledgeable staff is intense. At the same time we are constantly engaging in ways to improve our technology to maintain levels of scale, automation and efficiency.

How can administrators stay abreast of the rapidly evolving menu of hedge fund strategies currently on the market?

Information is knowledge. Staying close to the activities of a fund helps the administrator stay abreast of new developments. Our approach is to maintain records daily and to raise queries on a timely basis. We also hire operations specialists with expertise in specific asset classes. However, inevitably there can be an element of on-going catch-up for administrators with respect to certain esoteric investment activities as hedge funds explore new investment frontiers.

What unique challenges does to the provision of administration services to funds of hedge funds present?

Funds of funds present unique challenges because of the nature of the underlying fund investments and their non-standard terms. Collecting prices and other data in respect of these funds is a major challenge. And as institutional investors push for shorter reporting cycles, the need for creating efficiency in pricing portfolios increases.

The process for generating meaningful information to assist the manager in their investment process requires more than just accounting skills. The administrator has to adapt the reporting process to provide access to underlying fund data, liquidity profiles and cash projections. Added value as part of the funds of funds administration function has evolved into middle office services and drill down analysis.

What should a new hedge fund management business be looking for when viewing potential administrators?

Managers should start by determining their preferred solution. This is generally accomplished by extensive analysis of the options, namely:

  1. The manager implements their own portfolio management system and infrastructure and the administrator provides a standard administration service.
  2. An out-sourced solution where the administrator provides desk-top technology, middle officesupport and back office services.
  3. A combination of the above.

When assessing the administrator, the manager should evaluate:

  1. The experience and knowledge of the staff who will work on the fund and their understanding of the specific nature of the fund.
  2. Technology – available capabilities to expedite service levels
  3. Straight through processing capabilities to build a seamless process
  4. Reporting capabilities
  5. The administrator's reputation and integrity

Is increased institutional participation in hedge funds forcing administrators to "raise their game"?

Definitely. Institutional investors have become key drivers for all industry participants. It starts with their detailed due diligence and subsequently calls for a fully-fledged independent administration process that provides checks and balances, valuations procedures and timely, accurate reporting. They have served the industry well.

Is technological innovation helping you to provide a better service?

Technology is one of the key elements to the creation of an efficient, viable administration process. We are constantly seeking ways in which to automate trade processing and reconciliation as a core thread to our business. Avoiding manual entry helps mitigate error and promotes the timely production of reporting. In addition, technology helps add functionality to our offering. Innovation is a constant requirement in an industry that constantly seeks new investment opportunities.

Is it possible for a bank to exceed capacity when it comes to administrative services?

Capacity constraints have been prevalent for a number of years where demand for hedge funds has outstripped supply. It has resulted in administrators seeking strategic relationships to grow their business.

Has the potential departure of some of the 'old hands' of the hedge fund administration business impacted the level of service in any way? How do you avoid the negative impact that the departure of a seasoned executive can have on the business?

Fund administration will always be predicated upon good people, in particular those who are able to adapt to meet client expectations as they grow and evolve within the context of the industry. To avoid over-reliance on individuals, the aim is to build a bench of experienced staff who are able to build their careers on new opportunities within the company.

Is it true that the management community is exerting downward pressure on fees?

As a general comment, where the administration function becomes standardised and commoditised and funds grow in size, fees tend to trend down because of competitive pressure, but where it is clear that value is being added, we have not experienced any pressure to reduce fees.

What challenges do you think the potential 'retailisation' of funds of hedge funds will present to your sector?

We are not seeing any great moves towards retailisation and I haven't seen a major appetite for it, but if it were to happen, we could expect greater regulatory involvement and new structures to attract this new pool of investors – all of which will have an impact on the industry everyone operates.

Are you in favour of the concept of independent operational certification?

Yes, we have been SAS 70 certified for the last two years.

What in your view are going to be the most challenging emerging hedge fund strategies to provide an NAV for?

There are many new esoteric products that are difficult to track, validate and value. Trade loans, private loans are examples of structured products that are difficult to administer. Wherever we see difficulty in obtaining information or providing independent valuation, we seek to implement consistent procedures and complete disclosure.