Outsourcing shadow accounting provides a multitude of benefits including increased speed and scalability, better analysis and evaluations for hedge fund managers, and allows them to focus on their core business. In this piece, we look at these benefits in more depth.
Hedge fund managers are performing a balancing act as allocators continue to demand increased reporting frequency and accuracy while also expanding their requests for more detailed reports. For many, hedge fund shadow accounting services can play a key role in bolstering confidence, providing timely, accurate access to critical business information, and acting as a control check on data.
How outsourced shadow accounting adds value
The competitive benefits of independent shadow accounting include enhancing transparency and catching errors and inconsistencies. It also offers fund managers access to up-to-date, structured, insightful, and concise reports that can help improve decision making and support more productive conversations with allocators. Ultimately, the biggest value of outsourced shadow accounting is that fund managers can focus more on their core activity of building the business—and not on operations.
Top five benefits of outsourced shadow accounting
Here’s how outsourced shadow accounting can help hedge funds operate more efficiently while better serving clients and improving marketing efforts.
1. Straight-through processing increases speed
Straight-through processing, the ability to process transactions without manual intervention, is commonly provided by industry-leading outsourced shadow accounting firms. It offers speedier processes with reduced errors, allowing for the following improvements:
- Enhanced visibility into daily operations.
- In-house books eliminate dependency on fund administration data for warehouse and risk purposes.
- Daily three-way reconciliations provide a greater degree of visibility and control on operations.
- Daily monitoring mitigates adjustment to weekly net asset value (NAV) estimates
- Streamlines the month-end NAV review process.
2. Better analysis of trade breaks
A skilled shadow accounting provider will provide better, faster analysis of trade breaks. This sometimes results from the firm’s aggregate knowledge of where errors lie and focuses on break resolution with counterparties.
3. More accurate valuation
When a hedge fund hires the right outsourced shadow accounting firm, it can leverage the accounting firm’s valuation to challenge or validate the fund administrator’s calculations.
Investigation is key to this process and must look at whether the pricing policy has been followed down to the details in terms of the source and time of the price (closing price vs. mid-price). Over-the-counter (OTC) securities are trickier than listed securities because they have no universally agreed-upon price, which depends on the source. Modeling and accounting for accrued interest on the securities can also cause problems. Illiquid or thinly traded securities pose a challenge because their pricing depends on the client’s policy on issues such as how many days the pricing should go back or if it should rely on the bid and ask. Additionally, these policies may vary depending on whether the fund has a long or a short position. Improved accuracy is important because accurate information affects the NAV as well as the gross asset value (GAV) that is charged to new investors in the fund.
4. Easier adoption of new technology
Hedge funds sometimes turn to outsourced shadow accounting firms when they’re ready to adopt new technology so they can avoid investing in end-to-end systems. For example, introducing Advent® Geneva portfolio accounting software imposes a long learning curve. Hedge funds can get up to speed much more quickly when they can exploit the expertise of an outsourced shadow accounting firm that has used Advent® Geneva across a broad range of clients and asset classes.
Also, by using a shadow accounting firm, a hedge fund can reduce its need to invest in end-to-end technology. For example, the fund might have its own Geneva accounting software but rely on the shadow accounting firm for other aspects of its accounting and trade reconciliation.
5. Scalability with better performance
Hedge funds can rein in their staffing when they outsource shadow accounting. When an outsourced shadow accounting firm provides more reliable, timely data, the hedge fund doesn’t need as many employees to review that data. When hedge funds start using new asset classes, they can take advantage of the asset-class expertise already developed by the outsourced shadow accounting firm in its work for other clients. This makes for better trade processing, pricing, and reconciliation of those asset classes because, unlike the hedge fund’s staff, the shadow accountant has done it all before. Similarly, hedge funds can benefit from the outsourced shadow accountant’s knowledge of where trade breaks are likely to occur.
Ready to take the next steps?
Moving to outsourced shadow accounting lets fund managers focus on what they do best: managing money for a growing book of clients. It spares them the need to develop their in-house systems and related expertise. Instead, they can take advantage of an outsourced shadow accounting firm’s up-to-date technology and expertise informed by experience across the alternative fund industry.
Find out more about the benefits of outsourcing shadow accounting for fund managers in our increasingly complex investing and operating environment. Download our recent insight report here.
