“Investors today expect to be
provided with thorough and
informative reporting on a
timely basis, and often to their
42 CAYMAN FUNDS | 2019
Leanne Golding is a director at
Harbour. She can be contacted at:
Kevin Huys is a director at
Harbour. He can be contacted at:
allowing some of that operational infrastructure to remain outside the
investment manager’s direct operations often outweigh any perceived
inconvenience or risk.
As investment managers and their funds grow, determining when
to shift to new outsourcing service providers or when to bring
components of their operations back in-house will become crucial
While the practice of outsourcing has become widely accepted,
a high level of oversight by the manager and fund directors is
still required. In most instances, although the tasks have been
delegated, the ultimate responsibility remains with the manager or
the directors—those charged with governance cannot delegate away
Frequent and robust reporting from the outsourced providers is
required to ensure that appropriate oversight is maintained. Managers
and directors should also carefully consider whether within their
delegation they are also placing a reliance on the outsourced provider
to fulfil the requirements of a law or regulation. If that is the case, they
must document the regulatory status and complete periodic reviews
to confirm continued compliance.
Service agreements must also be clear on the tasks and roles that
are being outsourced.
Fee flexibility and creativity
Attracting and retaining capital has become more challenging in recent
years. This has placed downward pressure on fees, and resulted in greater
creativity with fee offerings. The Ernst & Young 2018 Global Alternative
Fund Survey found that 50 percent of the hedge fund managers surveyed
were offering customised fees and liquidity terms to investors through
special classes or managed accounts, up from 41 percent in 2016.
This trend will continue and result in a broad range of fee structures
that are designed to cater to a diverse and demanding investor
population. The possible options are limited only by the human
imagination, but managers should ensure that fee arrangements
result in a proper alignment of interest, and that they are easily
understood and calculable to reduce the likelihood of causing a net
asset value (NAV) misstatement.
It is important to consider a fee structure’s commercial appeal, the
equality of fees across similarly placed investors, and the ability of the
fund administrator to account for it properly.
Transparency and reporting
Customisation and creativity go beyond fund structures and their
related fees. Investors today expect to be provided with thorough
and informative reporting on a timely basis, and often to their precise
specifications. The details of many of these specific requests are
typically set out in the reporting section of a letter agreement or
Other investors prefer a separate managed account so that they
have full transparency of the portfolio. When entering into reporting
or transparency arrangements, managers need to consider the
feasibility of what is being requested, whether they have the data
points available to provide the information to investors in an accurate
and timely manner, and whether such information should also be
provided to other investors.
As the sophistication of investors’ data management capabilities
continues to grow, managers and service providers should be
evaluating and investing in technology, or seeking out third-party
providers, to ensure that they are keeping pace. In the future, the
inability to provide a high degree of customised reporting will cost
The introduction of Europe’s General Data Protection Regulation in
2018 was a big step forward for data protection, and the trend will
continue as other jurisdictions bring their data privacy laws in line.
The Cayman Islands will bring its Data Protection Law online later
this year. Firms will need to carefully navigate these regulations not
just in relation to investor data, but also how they obtain, store, share,
and utilise all data in their daily operations. ‘Big data’ offers great
potential to change the way we all do business, but with great power
comes great responsibility.
Evolution of audit
The ‘big four’ audit firms have made significant investments in
technology that are changing the way they conduct their audits.
Firms are performing real-time testing of NAVs throughout the year
which will reduce timelines at year-end, and are also automating the
exchange of data with administrators.
They are also using technology to review trends or anomalies in the
data, to help them focus their reviews. These technological advances
will not only allow for more efficient and timely audits, but will also
allow the audit firms to compile significant amounts of data from
their clients. They will now be able to analyse the data outside the
audit process which will allow them to identify industry trends and
best practices and significantly expand the industry insights they can
provide to clients.
These changes will affect us all in some way. Everyone needs to be
prepared to look ahead, anticipate, evolve, and innovate. The critical
topics we are discussing today could be replaced in six months or
a year with a new set of issues and concerns. The key is to remain
nimble and keep your eyes forward—as the title suggests, foresight