The hedge fund industry has adapted to many changes over the years—from new regulations to the massive shift to work-from-home operations in the spring of 2020. In a new whitepaper, we examine the factors that have enabled hedge fund managers to keep pace with those changes and rise above the competition.
1968-1997: The Ten Commandments
Before 1997, Tax Code section 864 provided that a non-US corporation would not be treated as engaged in a US trade or business and would not be subject to US tax on all of its income if it met certain criteria and performed a list of ten required activities, known in the industry as the Ten Commandments. These requirements mandated offshore fund administration for US-based hedge funds.
These administrators based in tax-haven jurisdictions could handle tasks such as communicating with shareholders and maintaining the principal corporate records and books, but they had no facility to support funds for complex products, valuations, reconciliations, or any form of analysis.
The 1997 Tax Payer Relief Act
When the Ten Commandments were repealed by the 1997 Tax Payer Relief Act, hedge funds were allowed more flexibility in the administration of their offshore funds. This meant administration could be supported by experienced Wall Street and City-trained staff. Some funds chose to build out and self-administer, while others chose to outsource.
The decision to outsource drove immense economies of scale through central platform administrators providing gold-standard financial technology, experienced back-office and accounting teams and complex valuation modeling.
As a result of economies of scale driving fee compression and industry scandal driven by frauds such as Madoff, in-house administration has almost entirely disappeared. Furthermore, centralized administrator platforms automated processing of the exponentially-increasing amounts of data and updated technology and workflows faster than ever imagined.
2020 and Beyond
As offices world-wide transitioned their employees to remote operations in an effort to keep them safe and mitigate the spread of COVID-19, process and staff efficiency became more important than ever. Some organizations are beginning to consider if some or all elements of their new work-from-home reality may become permanent, aided by technology such as artificial intelligence, machine learning, and natural language processing. By refocusing from a services-first to a technology-first mindset, organizations will be able to equip their staff to work remotely while supporting clients who are also working remotely.
To learn more about how technology will continue to drive the hedge fund industry forward, download our whitepaper Hedge fund administration – past, present and future.
Asset Management, Wealth Management