Why Do Hedge Funds Need a Shadow Accounting Solution?

Shadow accounting is a popular financial management tool that can help hedge funds manage complex portfolios. Shadow accounting is also a good way to understand how investments are performing and how they affect the overall investment strategy. Third-party fund administrators handle back-office operations and fund administration for many hedge funds. These services typically include net asset value (NAV) calculation, daily, weekly, or monthly profit and loss reporting, fee calculations, and other activities that constitute the official books and records.

What is shadow accounting for hedge funds?

Shadow accounting refers to the practice of maintaining an additional set of financial records or books to facilitate comparison with the third-party fund administrator. In the hedge fund ecosystem, fund admins serve as an intermediary between the hedge fund and its investors. Fund admins handle back office activities such as financial reporting, fund accounting, NAV calculation, profit allocation, and investor communication, among others, all of which are considered official records.

By leveraging a team of experts and infrastructure provided by fund admins, hedge funds can manage financial data and access various reports at a reasonable cost. However, there are many reasons why hedge funds are shifting to shadow accounting. Namely, hedge funds prefer to maintain one set of internal financial records. In fact, adopting shadow accounting can deliver competitive advantages that help build trust among potential investors.

Why shadow accounting for hedge funds makes sense

Shadow accounting servicing for hedge funds has become a common practice in the industry. Implementing an additional layer of control not only promotes transparency but also instills confidence in investors who may be wary of an uncertain environment. Below are some of the advantages a fund can get expect from shadow accounting:

• Readily available, real-time data
• Shadow NAV calculation
• Investor due diligence and relationship building
• Increased transparency
• Custom and ad hoc reporting
• Availability of granular performance metrics
• Integration with other systems (risk or performance management)
• Effective and efficient reconciliation

Which is better: in-house or outsourced shadow accounting?

Most large hedge funds have the capacity to build infrastructure and staff a dedicated team for in-house shadow accounting. For smaller funds, however, the cost of in-house shadow accounting servicing doesn’t make sense from the cost benefit analysis perspective.

Fortunately, outsourcing services have made it possible to implement shadow accounting and shadow NAV calculation at a reasonable cost. In this arrangement, experts who understand the nuances of shadow accounting consult with the fund and implement an industry-leading solution. Due to advances in technology and rising demand in the hedge fund ecosystem, any hedge fund can now outsource shadow accounting to the experts and focus more resources on core functions such as portfolio management, raising funds, entrepreneurship, and strategic planning.

Choosing an outsourcing provider for shadow accounting

Choosing the right outsourcing firm is very important. A hedge fund should consider all of the following factors before deciding on the right vendor:

• Trusted by hedge fund peers
• Experience in shadow accounting
• Functional and technical experts
• Cost efficiency and ease of access
• Integration with upstream and downstream systems
• Value-added services
• Flexibility to accommodate custom requests

IVP Shadow Accounting for hedge funds provides a highly capable and cost-effective solution for managing complex financial portfolios. By partnering with IVP, hedge funds can benefit from our “digital-first” approach to automating workflows according to industry best practices. In addition, customized solutions allow hedge funds to choose partial or full shadow NAV services tailored to a specific strategic approach. Shadow accounting servicing has the added benefit of scaling up activity when volumes rise at month-end without compromising speed or accuracy. Critically, choosing IVP Shadow Accounting means there is no need to invest in internal accounting teams, infrastructure, or technology. A hedge fund’s accounting needs can be met securely with cloud access to internal portfolio accounting and investment accounting systems. Essentially, these shadow accounting services remove the back office burden of adopting complex new strategies or entering new asset classes.

Capabilities offered with IVP Shadow Accounting include:

• Security setup and trade booking workflow
• Daily cash, positions, and P&L reconciliations
• Corporate actions processing
• Daily portfolio valuation and shadow NAV determination
• Monthly cash, positions, and P&L reconciliations and NAV closing
• Internal books and records preparation
• Master-feeder fund accounting and allocations
• Management fee and performance fee calculation (enabling hurdle, high water mark)
• Profit and loss allocation (even and uneven)
• Investor subscriptions/redemptions tracking and NAV calculation
• Integration of fund and portfolio accounting
• Custom reports

Shadow accounting for hedge funds is a valuable way to improve accuracy, transparency, flexibility, and risk management. By adopting IVP Shadow Accounting, hedge fund managers can better serve investors and promote the overall health and transparency of the industry. With our services, hedge funds gain access to accurate financial data that drives better decisions about investments and strategies. Our operational services teams can take on a wide range of time-consuming and manually intensive tasks, such as reconciliations processing, that typically burden the middle and back office. The result is powerful shadow accounting with a significantly lower total cost of ownership that frees hedge funds to focus on optimizing performance.

Learn more about IVP Shadow Accounting or contact sales@ivp.in to set up a demo.