A third-party fund administrator is not required to successfully operate a hedge fund; however, they can relieve a significant amount of the burden from the manager and improve the consistency with which certain tasks are handled.
Many managers use administrators to service their investors and effectively act as their outside accounting department. Services typically include monthly accounting and net asset value (NAV) calculations, performance fee calculations, record keeping of investors, and management fee calculations. While these functions can certainly be done internally, it can be time consuming for the manager and costly if staff is hired to perform them.
Fund administration firms provide additional layers of financial security and controls that help protect investor interests and prevent certain types of fraud.