PDF - Shadow Accounting - Fundtec

1. How Shadow Accounting may be or may not be helpful in Hedge Fund Investments? Over the last decade, an increasing number of hedge and other investment funds have implemented shadow accounting, with the goal of maintaining a duplicate set of books to improve data accuracy and integrity. Investor demand for openness and accountability in the wake of significant financial crimes is one factor for this acceptance. If your fund is looking about establishing shadow accounting or expanding or reducing the scope of its present shadow accounting processes, it's crucial to weigh the costs & advantages and customise your system to your risk profile. If you want to know how can Shadow Accounting be helpful in your Hedge Fund Investments, ask yourself these questions: What is the scope of the project? In general, shadow accounting refers to a system in which two sets of financial books and records are maintained for the goal of spotting errors and inconsistencies. In the context of a fund, the word can refer to anything from double-checking a third-party administrator's Net Asset Value (NAV) computations to totally copying all of the administrator's financial records. It can be challenging to choose a system or systems to execute this role, and adequate resources should be allocated to the selection and implementation. Choosing an outsourced shadow accounting company is a similar crucial decision that should be made after thorough research. Is it better to keep it in-house or outsource it? Although many funds execute shadow accounting in-house, there has been a trend in recent years to outsource shadow accounting to a second administrator, accounting firm, or other service providers. Investor demand (investors may be more comfortable with a third party), relative costs and benefits play a role in the decision to outsource shadow accounting or keep it in-house. Outsourcing has a number of advantages, the most important of which is that it allows fund managers to concentrate on their core competencies, such as portfolio management, fundraising, and strategic planning. Internal shadow accounting, particularly full shadowing, can put a lot of burden on a fund's administrative, IT, and human resources. Is it better to go all-in or go half-in? The shift from full shadowing to partial shadowing has been a recent trend. Certain accounting activities are becoming increasingly standardised and automated, such as NAV computations, reconciliation, and fund statement administration. In addition, most (if not all) administrators are getting SOC (System and Organization Controls)1 reports from auditors, which are reports on the design and efficacy of controls at a service organisation. This can give fund managers and investors more confidence in the performance of third-party administrators. Partial shadowing lowers a fund's costs by concentrating on higher-risk procedures like illiquid asset valuation and sophisticated fee calculations. However, regardless of the level of shadowing, fund management is ultimately liable to investors for the operations of a third-party administrator. As a result, strict supervision is required. Identifying Your Risk When weighing the benefits and drawbacks of shadow accounting, it's necessary to use a risk-based approach. Full shadowing may be beneficial for some funds to reduce risk and meet investor responsibilities. Duplicating 100% of an administrator's accounting activities — including functions that pose little or no risk — may be overkill for other funds. A partial shadowing system that concentrates on an administrator's higher-risk processes and outputs could be the most expensive solution for these funds. Please click on the below link, if you are looking for services for shadow accounting: https://www.fundtec.in/shadow-accounting-services