5 Key Benefits of Shadow Accounting Outsourcing

Outsourcing shadow accounting offers fund managers substantial advantages, including faster processes, scalability, and enhanced insights, all while allowing them to concentrate on their primary investment strategies. This article explores these benefits in more detail.

As investor demands for reporting frequency, accuracy, and detail continue to grow, fund managers face the challenge of meeting these expectations efficiently. Shadow accounting services help address this by delivering timely, precise data that reinforces transparency and supports informed decision-making. Additionally, they serve as a valuable control check on data, instilling greater confidence in the reporting process.

Adding Value by Outsourcing Shadow Accounting

Independent shadow accounting gives fund managers a critical advantage when entering new asset classes, providing immediate expertise without an additional investment in infrastructure, staff, or complex technology. This allows managers to quickly scale operations, adding new funds, structures, or assets while integrating advanced business intelligence tools for deeper insights.

The competitive benefits of outsourced shadow accounting include enhanced transparency and the ability to detect errors and inconsistencies that might otherwise be overlooked. Fund managers also benefit from receiving up-to-date, structured, and concise reports, which improve decision-making and foster more meaningful conversations with allocators. Ultimately, this approach enables managers to focus more on building the business, leaving operational challenges in the hands of specialized experts.

Here are five specific ways shadow accounting can give hedge funds a competitive edge:

1. Straight-through processing accelerates transaction workflows

Straight-through processing (STP), which automates handling of transactions, is a key capability of top shadow accounting service providers. By automating and accelerating financial workflows, STP minimizes errors and significantly enhances operational efficiency:

• Improved efficiency and accuracy: The automation provided by STP significantly speeds up transaction processing while reducing the risk of manual errors. This leads to faster, more reliable data processing, allowing fund managers to operate more efficiently and with greater confidence in the accuracy of financial data.
• Enhanced operational visibility: By automating daily transaction flows, STP improves visibility into day-to-day operations. Fund managers can track the movement of assets and liabilities in real time, enabling a more proactive response to market changes and operational issues.
• Real-time access to in-house books: With shadow accounting services, managers no longer have to rely on fund administrators for critical data needed for data warehousing and risk management. Funds can access real-time, accurate financial information directly from internal systems, which is particularly valuable for time-sensitive decision-making and reporting.
• Three-way reconciliation for greater control: Daily three-way reconciliations—which compare internal books, fund administrators’ records, and custodians’ data—offer fund managers tighter control over operations. This helps identify discrepancies early, ensuring any issues are resolved promptly and maintaining alignment across various data sources.
• Daily monitoring for accurate NAV estimates: By enabling close daily monitoring of financial data, STP minimizes the need to adjust weekly NAV estimates. Real-time data monitoring helps prevent significant end-of-week corrections, enhancing the accuracy and reliability of the NAV.
• Streamlined month-end NAV review: The efficiency of STP simplifies the month-end NAV review process. By automating much of the groundwork throughout the month, STP allows fund managers to focus on the review and validation of key data, significantly reducing the time and effort required to close the books at the month-end.

2. More precise valuation

When a hedge fund collaborates with the right outsourcing provider for shadow accounting, it can utilize the provider’s expertise to challenge or validate calculations made by the fund administrator.

A thorough investigation is crucial in this process, focusing on whether the fund’s pricing policy has been followed, including the source and timing of price data, and distinguishing between closing prices and mid-prices. Over-the-counter (OTC) securities present unique challenges, as they lack universally accepted pricing and depend heavily on the source of the valuation.

Moreover, accurately modeling and accounting for accrued interest can complicate matters. Illiquid or thinly traded securities require careful consideration, as their pricing often hinges on the client’s specific policy regarding how far back to assess prices and whether to use bid and ask values. These policies may differ based on whether the fund holds long or short positions.

Ultimately, improving valuation accuracy is vital because it directly influences the NAV and gross asset value (GAV) charged to new investors. By leveraging the insights of a shadow accounting provider, hedge funds can achieve greater precision in valuations, fostering investor confidence and ensuring robust financial management.

3. Scalability with better performance

 By outsourcing shadow accounting, hedge funds can effectively reduce staffing needs. With reliable and timely data provided by an outsourced shadow accounting firm, there is less need to rely on internal teams to review this information. Funds can also tap into the extensive expertise these firms have developed working with other funds when exploring new asset classes. This expertise enhances trade processing, pricing, and reconciliation for these asset classes, because the shadow accounting teams bring experience that the hedge fund may lack. Additionally, hedge funds benefit from the shadow accounting team’s insights into potential trade breaks, enabling a more proactive approach to issues that could disrupt operations.

4. Faster analysis of trade breaks

Trade breaks, which occur when discrepancies arise between a firm’s internal records and those of external counterparties, are a common challenge. Breaks often stem from differences in data inputs, timing, or valuation methods. A skilled shadow accounting provider can mitigate these issues by delivering precise and swift analysis of trade breaks. Drawing on extensive industry knowledge, they can identify frequent error patterns and focus on resolving breaks efficiently with counterparties. This proactive approach ensures more accurate reconciliations, reduces financial exposure, and strengthens overall accounting integrity.

5. Seamless adoption of new technology

Hedge funds often turn to outsourced shadow accounting providers to simplify technology adoption, bypassing the need for extensive, in-house investments in end-to-end systems. Implementing essential tools like SS&C Advent Geneva® portfolio accounting software, for example, requires substantial expertise and careful planning due to its complexity and long learning curve. With an experienced shadow accounting partner who is skilled in deploying Geneva software across diverse clients and asset classes, hedge funds can achieve a faster, more seamless transition to operational readiness.

This is also where IVP Geneva Consulting also adds significant value. IVP’s dedicated Geneva consulting team is composed of experts who understand the critical role Geneva plays in hedge fund and institutional asset management. They provide comprehensive services, from initial implementation and upgrades to RSL reporting and workflow automation. With IVP Geneva Consulting, funds can streamline operations with reliable support, ensuring consistency and efficiency while minimizing the operational risks of adopting and managing Geneva technology.

How IVP Can Help

With IVP Shadow Accounting, hedge funds gain access to advanced tools and expertise across all these critical functions, from precision in daily valuations and reconciliations to seamless technology integration. IVP’s team brings extensive experience working with diverse asset classes, allowing funds to scale effortlessly while leveraging real-time reporting, automated workflows, and robust three-way reconciliation. Through tailored solutions that enhance operational visibility, accuracy, and responsiveness, IVP Shadow Accounting empowers hedge funds to focus on strategic growth while confidently meeting the heightened demands of today’s investors.