The Evolving Back-Office Landscape

Back-office technology in the alternative investment management space is changing rapidly, driven by constant pressure to reduce operational costs and deliver better alpha to investors. Traditionally, in order to have a solid back-office setup, hedge funds and private equity firms were required to maintain an accounting system that shadows their fund administrator — the only way a manager could confirm the financials their admin produces are correct.

However, this process is extremely arduous and cost-prohibitive as systems have become increasingly expensive. The industry has longed for a cost-effective approach to conducting shadow. Newer technology vendors that lacked the capabilities of legacy accounting systems recently coined the term Investment Book of Records (IBOR) and labeled the traditional approach as Accounting Book of Records (ABOR). These newer systems often couldn't conduct full ledger accounting and in many cases lacked the ability to keep track of historical positions, relying instead on daily position and cash refreshes from accounting systems.

ABOR: Full Accounting Book of Records

ABOR represents the traditional, comprehensive approach: full internal records that mirror the fund administrator's books. If you have the resources for it, ABOR provides maximum depth and investor confidence. Your investors will know how thorough you are with your shadow process. The tradeoff is significant cost and operational overhead.

IBOR: Investment Book of Records

IBOR is a lighter approach — keeping inhouse records to the minimum. Your portfolio managers have access to what they need for investment decisions, and anything non-trading can be "plugged in." This approach is cost-effective and simpler to maintain.

However, there is a key consideration: the lighter IBOR model makes you heavily dependent upon your fund admin for books and records, and downstream functions you may want to control inhouse — such as waterfall allocations, fee calculations, and K-1 reconciliations — will therefore rely upon your admin. It also makes future administrator transitions significantly more complex.

Perfona: The Hybrid Approach

OpEff pioneered the first-ever web-based portfolio accounting system that is a hybrid of ABOR and IBOR — and the first system to give managers the choice of which model to implement. At its heart, Perfona is a portfolio accounting system, but it enables a manager to skip the general ledger and keep a running list of investment records with historical trades if preferred.

Perfona is the only investment management system in the industry to provide:

  • A real-time general ledger (ABOR)
  • An optional position-only based portfolio management system (IBOR)
  • Comprehensive investor waterfall calculations for both hedge fund and PE structures
  • A full investor and prospect management CRM
  • The ability to pick and choose modules to complement the specific deficiencies of your firm's back office
After all, it's not the portfolio accounting that interests investors — it's their own capital, and how well the manager has done over time with their money. Waterfalls are what matter. And OpEff's team of subject matter experts has made it possible to systematize even the most complex waterfall structures.