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ADMINISTRATION IN BERMUDAthat recruiting them is a well-trodden procedure,well understood by the firms involved.Administration companies must advertisethrice three weeks’ running for Bermudians tofill a vacancy. If this fails, the firm may look elsewhere,bringing in employees from the Americas,Europe or Asia.For the accountancy firms, the process hasbeen made even easier. Advertising is donecentrally by Bermuda’s Institute of CharteredAccountants. It is especially difficult for accountancyfirms to fill their positions as employeesneed accountancy qualifications.Brook notes the accountancy firms struggleto retain their talent for more than two or threeyears as they are a popular recruiting ground forother industries, be it administration or backofficestaff in hedge funds or insurance.I’M A LUMBERJACK AND I’M OK...Both accountants and the administrators have aspecial relationship with Canada, in recruiting.“A lot of our young people go there to be educated.When we recruit, even for local talent, wewill sometimes go to universities in Canada to seewhat Bermuda’s young people are doing that willoffer them opportunities when they come back,”says Arandjelovic.The aerial hop is 150 minutes to Toronto fromHamilton, Bermuda’s capital.“It’s also a cultural thing. Canadians fit in betterthan some other cultures. Irish and English tendto fit in well because they’re island communities.Broadly, in the US, there are those that fit in andthose that don’t. Living on a small island is not foreverybody, although it is a wonderful lifestyle,”adds Riker.Recently there has been an influx of staff withhedge fund experience, which has seen a largeamount of recruitment made from Dublin, thoughBrook says it has not been occurring for longenough to say if it is new long-term trend.GRASS ISN’T ALWAYS GREENERLewnowski notes it can be difficult to hire fromabroad, both because of restrictions on immigration,and because the appeal of living in Bermudahas waned compared to 20 years ago.The government has a part to play here. Thereare rules in place restricting the immigrationof people onto the island, which, coupled withrestrictions on the ownership of property for foreigners,does limit the number of professionalsmoving to Bermuda.However, Robert Bonehill at JP Morgan Tranautis confident the government will always do whatit takes to promote the standing of the island’sfinance industry globally.CHALLENGESThere is a question over how much more the Bermudianadministration industry can grow.As a small island, there is finite room for growth,although small niche administrators, and indeedsmall funds domiciled on the island, do not take upthe room of a multi-national corporation.Tom Davis,MeridianCollins believes the industry is not far fromcapacity. “There is enough administration in Bermudaalready, I don’t think it will expand all thatmuch now,” he says.“The competition is between us and the otherBermuda administrators, rather than betweenjurisdictions.” Ernst & Young’s Chad Critchleyagrees Bermuda has capacity constraints on itsadministration business.However, as some administrators currentlyturn business away, the industry clearly has furthergrowth potential. Administration businessesare not necessarily labour-intensive, while theincreasingly global playing field ensures there isplenty of supply.“Bermuda’s reputation is crucial. We may not begetting quantity but the focus of our hedge fundindustry has always been on the quality of thebusiness we are attracting,” says Jessel Mendes,partner at Ernst & Young.“Canadians fit in better than someother cultures. Irish and English tendto fit in well because they’re islandscommunities. Living on a small islandis not for everybody although it is awonderful lifestyle.”TONY RIKER, HSBCE SECURITIES SERVICES“Competition from other offshore jurisdictionsis a challenge but I believe we are holding ourown. When people think of Bermuda as an offshorefinancial centre, insurance is probably thefirst thing that comes to mind but I believe that isstarting to change.”Collins concedes the industry may be split toan extent between administrators working withhighly complex strategies or funds, and thoseconcentrating on more simple ones, though thisis not a new phenomenon, he says, nor a trendevidently on the increase.INVESTOR-LED BIFURCATIONA more pronounced bifurcation is that whichhas arisen between those serving high-net-worthindividual clients and those serving institutions.The two investor types are pulling the industryin different directions, creating two differenttypes of fund, and administrators need to caterto these needs.“To a certain extent, the move of the industrytowards institutional investors does change thename of the game in terms of what is expected(of administrators),” Collins says.In other ways, administrators will continueto be challenged by the inherently evolutionarynature of hedge funds.The recent increasing interest of hedge fundsin areas traditionally the domain of privateequity funds, in particular, has created a realchallenge. Kneen notes BCB has worked witha number of funds on side-pocket structures.“We’ve come across side pockets but not as anoverwhelmingly important issue,” says Collins.Different strategies require different types ofwork in administration, as larger funds are lesslabour intensive for each unit of capitalisation.For this reason, a centre specialising inadministration, such as Bermuda, can supporta significant number of businesses, somecatering only to large funds, other only to smallones, and others to niche strategies.Butterfield says it has no minimum size offund that it will administer, though it viewsitself as a conservative business, making a consciouseffort not to overstretch itself and makecommitments it will not be able to deliver on.It is, therefore, highly selective about thebusiness it takes on, and not just on the basisof funds it considers to be susceptible to fraud.BCB actively focuses on smaller hedge funds,capitalised at less than $100m, where it believesit has an edge as a smaller local player, able totake quick decisions and with good technologyplatforms and a full suite of banking productsto offer clients at competitive rates.ON THE FRONT LINEAdministrators are one of the first lines ofdefence for the investor against fraud, and it iscertainly the administrator that is in the bestposition to detect early irregularities that couldbe indicative of misbehaviour by the hedgefund manager.As such, administrators seem unanimous thatthe reputation of the industry is of paramountimportance.Plans for compulsory registration of theisland’s administration community met withlittle resistance (see regulation piece on page 27-28), while all practitioners espouse the importanceof maintaining the highest standards.Kneen says it is not difficult to detect fraudulentactivity in a fund if the due diligence andoversight proceduresthat are put in place aresufficiently stringent.Warning signs, he explains, typically includedeviation of a manager from their normaltrading patterns, or unusual returns. Hughesnotes frauds such as that perpetrated at WoodRiver are more frequent at funds that do nothave independent administrators.Bonehill says the chance of fraud whenadministration is conducted properly is remote.Hughes disagrees, noting that a monthly netasset value (NAV) calculation leaves a long gapfor a fund manager to act fraudulently beforean administrator checks the figures again.Certainly, the evidence suggests that independentadministration is not a guaranteeagainst fraud.KEY POINTSBermudian administrators see the lifestyle,proximity to the US and direct flights to Europe askey drawcards in attracting and retaining staff.Bermuda has a selection of large global playersand administrators who specialise in servingsmall- to mid-sized hedge funds.While comulsory licensing of administrators metwith little resistance administrators note theyshould not be seen as the only way investors candetect fraud.32 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com