Ten Reasons Why Your Fund Needs an Accounting Firm

29 May, 2012Accounting News
Ten Reasons Why Your Fund Needs an Accounting Firm

Hedge funds are hugely complex investment vehicles, and this complexity extends in many dimensions. In this blog, we’ll address the role of an accounting firm in the launch and operation of a hedge fund. It goes without saying that no hedge fund can operate without accounting expertise. Also note that is often an overlap between accounting and legal responsibilities in a hedge fund. A good hedge fund consulting service provider can recommend, supply and/or coordinate experts in various disciplines, including accounting and auditing.

 

Here are ten reasons why your fund needs an accounting firm:

  1. Organization

    Accountants can help you evaluate the financial implications of different structures for your hedge fund, depending on your strategies and markets. The choices are wide ranging: limited partnership vs. limited liability corporation, onshore vs. offshore fund, master-feeder arrangements, etc.

  2. Accounting Systems

    Your system must satisfy the internal requirements of your firm and the reporting requirements of your jurisdiction. Each jurisdiction has its own peculiarities that must be addressed by expert accountants. For instance, many hedge funds in the US elect mixed-straddle accounting to simplify the reporting of short- and long-term capital gains on futures transactions. Also, accounting systems associated with “middle office” must constantly monitor portfolio and firm-wide risk.

  3. Partnership Accounting

    Setting up the system that registers and tracks investor contributions, withdrawals and income. There are many wrinkles to be ironed out: investor accreditation, contribution and withdrawal constraints, lock-ups, side pockets, fees, high-water-mark calculations, etc.

  4. Tax Preparation

    Most hedge funds pass income tax obligations through to investors. There are issues of reporting (i.e. US Forms 1065 and K-1, etc.) and withholding that vary with fund jurisdiction and investor domicile.

  5. Portfolio Accounting

    Booking of all transactions, marking assets and liabilities to market, calculating NAV, knowledge management etc.

  6. Profit/Loss Reporting

    Your traders live or die by their profit/loss reports. The accounting must be accurate and complete. Sophisticated schemes like position accounting determine the total gain or loss on a set of related transactions: purchase and sale, hedging of various risks, leverage costs, currency conversions, dividends and interest, etc.

  7. Operations

    There are a myriad of accounting calculations that are performed every day to operate a hedge fund. This includes items like maintaining the position and transaction data, accounting for splits and reverses, cash and non-cash dividends (including franking), corporate actions, cancel/rebook of transactions, reconciliations and settlements.

  8. Auditing

    The auditor must sign off on your procedures, which means it must test your systems, confirm your inventory, verify your reporting and meet the audit requirements of the local jurisdiction.

  9. Security

    Accountants are increasingly involved in ensuring the security of items like investor portal technology, online communications with counterparties and institutions, data transmission (with services like SWIFT), etc.

  10. Cash Management

    Setting up reporting systems to facilitate optimal cash utilization throughout the trading day and overnight.

  11. There’s more, but we think the point is made

    Hedge funds depend on accounting firms in one way or another every second of every business day.

About Eric Bank

Eric Bank is a professional writer specializing in the Hedge Fund Industry.