Shadow Reconciliations

These days investment managers must not only hire a fund administrator to increase investor confidence but also ensure that fund administrator has fulfilling its duties. Therefore investment managers must conduct some level of shadow accounting to make sure that positions and cash reconcile to their fund administrators. This activity is highly unproductive and is not directly related to the business of investment managers. OpEff provides shadow reconciliation services so that investment managers can be confident that their fund administrator is not missing out anything.

The Need for Reconciliations

Each of these steps carries a risk of miscalculation. For example, a slight mismatch in the crystallized incentive can throw off a partner's capital balance, resulting in the fund’s monthly income being allocated incorrectly among all the partners in the following period and the error would therefore impact all partners in the fund and not be isolated to a single partner. This is a more nuanced error. Most common errors are resulted from miscommunication between the hedge fund, its investors and the fund administrator. This can cause issues such as a wrong incentive fee rate being applied to the investor, an investor being placed in a wrong share class, or the big classic error, the fund admin completely missing out recording a redemption. Therefore, it becomes extremely critical to reconcile investor allocations even if a fund administrator is handling it.

In addition to mitigating risks of miscalculation, this reconciliation exercise affords the hedge fund powerful data about its investors. This can include the demographics of various investors, the liquidity schedule attached to various share classes, investment behaviors across various clients, and liquidity forecasting for the fund in general. Additionally, IR teams and PMs can have investor history at their fingertips inhouse so that they can discuss accounts with their clients without having to wait on the fund administrator to provide capital activity reports. Lastly, having a systematic reconciliation rather than spreadsheets gives confidence to a fund's investors and attests the fund's commitment towards rock solid state of the art back office infrastructure. Investors are increasingly demanding such checks to the fund admin as a part of their ODD and as a robust control measure. A further relatively uncommon benefit of having these records inhouse is that the hedge fund can perform a tentative assessment of its tax liability throughout the year unlike waiting to see what the tax bill would be in the following year during the tax season.