A Service Provider Switch - Raise the Yellow Flag

Forbes reported that the NIR group, which has recently faced accusations of faulty returns, has just switched firms to provide valuation services. It is reported that NIR previously worked with a third-party firm for valuation services called WTAS. Interestingly, the WTAS home page describes it services as, "We specialize in full service individual and business entity tax compliance and consulting. Our goal is to provide you with opportunities and solutions to help you attain your vision." No mention of valuation services here.


The interesting part of this story is that just a few days ago NIR's Corey Ribotsky told Forbes in a statement: "It is also notable that Mr. Mizel's complaint insinuates a claim that AJW's assets have been improperly valued, yet AJW utilized a third-party valuation service (WTAS)." Even more interesting, NIR is not naming who this new mystery third party valuation agent is.

A service provider switch, regardless of which function the service provider is performing for a hedge fund should always raise a yellow flag at a minimum, if not a full blown red flag. Obviously, certain service provider functions (i.e. - auditor, administrator etc.) are more sensitive than others (i.e. - information technology provider). When evaluating a service provider switch there are three critical points to consider:

• Motivation for making a switch


• Timing of the switch


• How long the switch takes

Motivation for making a switch

Some hedge funds are proactive, others are reactive. Switching a service provider in response to litigation or a specific large investor concern may not be in the best interest of the entire organization. Other reasons a hedge fund may switch a service provider may include fees, perceptions of a particular service provider etc.

Timing of the switch

Investors should consider whether a hedge fund is selecting the appropriate time to make a service provider switch. Monitoring not only the reasons but the timing of a hedge fund's decision to terminate one service provider in place of another is also important. As an extreme example, a hedge fund switching auditors before an audit would not be the best timing.


How long the switch takes

Certain service providers take longer to complete a switch than others. Legacy hedge fund administrators for example often require a number of months at a minimum to properly complete a switch. Often times, it takes a few months of running in parallel with two administrators to complete a switch. A hedge fund may announce a switch, but it may not be completed in actuality for quite a long time. Hedge funds can take several steps to facilitate this process before a switch is complete and investors should inquire as to whether a hedge fund has taken such steps.

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