One key aspect of hedge fund operations is accounting, which involves the tracking and reporting of financial transactions, holdings, and performance. Shadow accounting is a method of accounting that allows hedge fund managers to maintain a parallel set of accounting books and records along with the set managed by the fund admin. Shadow accounting for hedge funds provides visibility into a fund’s financials in a more timely manner as opposed to waiting for month-end, which is when fund admins typically share official accounting data.
Overall, shadow accounting is intended to improve the transparency of fund operations and eliminate potential errors or omissions in recorded activity. Previously, this sort of accounting was performed internally by hedge fund managers themselves. But new technology is making it feasible for third-party providers to provide shadow accounting services instead.
In fact, as the cost of traditional accounting continues to rise, more and more hedge funds are turning to third-party shadow accounting services as a cost-efficient alternative. Shadow accounting services are also becoming more popular among hedge funds because of all the advantages they offer in addition to lower costs, such as overnight delivery of accurate and reliable data and enhanced internal reporting for investment teams.
Let’s take a closer look at how shadow accounting benefits hedge funds and how IVP Shadow Accounting services can provide these benefits and more.
Six Benefits of Shadow Accounting Services
While shadow accounting is not new, it is growing in popularity because it helps hedge funds save costs and improve reporting efficiency. Overall, there are six big advantages of using shadow accounting:
- Timeliness: One of the main reasons hedge funds rely on internal accounting is to get the data faster. Hedge funds need accurate, up-to-date accounting data to make informed investment decisions and manage risk. If accounting data is delayed, it can result in financial losses due to incorrect reporting. Shadow accounting ensures rapid access to accounting data.
- Accuracy: Precision is vital for hedge fund managers, who need to make sure investments are being properly accounted for. Shadow accounting allows hedge fund managers to verify financial data with confidence. This can be particularly important when market price volatility is high or market conditions are changing rapidly.
- Transparency: In today’s highly competitive fundraising environment, hedge funds need to meet rigorous operational due diligence expectations of allocators in order to attract capital. Having the right fundamentals in place is critical for success. Shadow accounting helps provide the assurance that allocators require, building trust while safeguarding investors’ money. Shadow accounting also helps improve transparency, ensuring that investors and regulators receive a clear, comprehensive view of financial performance. In other words, shadow accounting builds confidence in the industry while promoting good governance and compliance practices.
- Flexibility: Shadow accounting for hedge fund managers offers a unique ability to maintain multiple accounting books and records and methodologies simultaneously. This is especially helpful for hedge funds operating in various countries and jurisdictions, because it allows them to adopt specific accounting practices for each location. Shadow accounting can also be beneficial for hedge funds with complex investment strategies, as it enables funds to maintain accounting records tailored to individual needs.
- Risk management: Shadow accounting helps improve risk management for hedge funds. By maintaining a parallel set of books and records, hedge fund managers can access positions, exposures, and other risk data more frequently and with higher accuracy. This helps identify and mitigate potential risks more effectively, protecting the interests of investors and promoting the long-term stability of the hedge fund.
- Customization and integration: The ability to generate custom reports and insights helps hedge funds meet the ever-evolving demands of internal stakeholders, investors, and regulators. With automated systems, custom reporting becomes essential for off-cycle and real-time analytics. The advantage of shadow accounting is that fund managers and executives are no longer bound by service level agreements with fund administrators, which typically do not cover off-cycle report requests or the turnaround times senior management expects. Shadow accounting gives hedge funds the ability to report on their own schedule, allowing a more comprehensive, agile, and cost-effective approach to custom reporting and analytics that can be a true competitive edge.
What are Shadow Accounting Services?
Most large asset managers have the capacity to build the infrastructure and retain the staff required for internal shadow accounting. For small and medium-sized asset managers, however, the infrastructure, resources, and total cost of shadow accounting may not be a viable option.
In these cases, outsourcing via shadow accounting services with a proven vendor is a reliable and time-tested option, typically available at a reasonable cost. By outsourcing the shadow accounting process, hedge funds can continue to focus only on their investment strategies and simply monitor the shadow accounting service provider for quality and completeness of delivery. In other words, funds can outsource shadow accounting to the experts and focus instead on core functions like portfolio management, fundraising, entrepreneurship, and strategic planning.
IVP Shadow Accounting Services provide a cost-effective solution for managing complex financial portfolios. By partnering with IVP, hedge funds and others can benefit from our “digital first” services that automate processes using industry best practices. In fact, customized services are available that allow hedge funds to choose partial or full shadow NAV services tailored to a specific strategic approach. Shadow accounting services have the added benefit of easily scaling up when volumes rise at month-end without compromising speed or accuracy. Of course, outsourcing also eliminates need to invest in internal accounting teams, infrastructure, or technology. A fund’s shadow accounting needs can be met with secure cloud access to internal portfolio accounting and investment accounting systems. These services also remove the burden of adopting complex new strategies or entering new asset classes independently.
How IVP can help
Shadow accounting is a valuable tool that helps hedge funds improve timeliness, accuracy, transparency, flexibility, and risk management. With IVP Shadow Accounting Services, hedge fund managers can better meet the needs of both investment teams and investors as well as promote the overall health and transparency of the fund. By using our services, managers gain access to better financial data in a timely manner. Plus, our team takes on the most time-consuming and manually intensive tasks, such as reconciliations processing, that can place a heavy burden on a hedge fund’s middle and back office. The result is a powerful shadow accounting capability delivered by the highest quality system on the market with significantly lower total cost of ownership, one that leaves funds free to focus on optimizing performance.
Learn how IVP Shadow accounting can help investment funds to verify the results of their outsourced administrator including NAV, fees, P&L and financial calculations.
Latest blogs delivered right to your inbox
Resources For Growing Your Firm
IVP’s FinanceForward Thinking
Discover the latest trends, find out how your peers are accelerating their digital transformations, get updates on evolving products, and more.