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This is why every hedge fund should outsource shadow accounting

Insight 21 June 2022

This is why every hedge fund should outsource shadow accounting

Below we highlight four reasons why hedge funds should consider outsourced shadow accounting.

A growing number of funds have adopted shadow accounting, or the practice of keeping a separate set of fund records for the sole purpose of enhancing the accuracy and integrity of the fund data produced by the fund administrator.

Increased regulations, industry competition, due diligence requirements and client service demands have made shadow accounting a must-have for hedge funds, especially those courting institutional capital. Some investment management firms perform it in-house, but this can place a significant burden on an investment firm’s financial, IT, and human resources departments. Thus, third-party shadow accounting is becoming an industry standard.

By leveraging a third-party shadow accounting provider, hedge fund personnel can focus on core activities, including portfolio management, capital raising and strategic planning. Below, find 4 reasons hedge funds should consider outsourced shadow accounting:

Data at your fingertips

Accurate, real-time financial data is an extremely valuable resource across the investment management firm’s functions. A centralized, up-to-date data hub can fuel informed internal decision-making. This amplifies the effectiveness of management information dashboards, front-office tools and risk management functions.

Ultimately, decision-making and the ability to articulate the firm’s competitive advantage to prospects is improved with a robust shadow accounting program.

A competitive edge in capital raising

In a competitive environment, third-party shadow accounting assures prospective investors their money is being accounted for correctly. Most allocators prefer third-party shadow accounting over an in-house team for an additional layer of verification.

Outsourced shadow accounting signals to prospective (and current) investors that the investment manager takes operational risks seriously and are taking the steps to ensure the financial data is accurate. As a result, the firm and its funds will be more attractive to institutional investors.

Better client service

The ability to provide high-quality, responsive services to investors is key in attracting and maintaining institutional capital. With evolving reporting expectations, outsourced shadow accounting can provide more information, faster, without the burden on the internal team.

Outsourced shadow accounting can help firms close the gap between the abilities of the in-house team and institutional investors’ expectations.

Additional flexibility and independence

Shadow accounting ensures that the information the investment manager is receiving from the fund administrator is reliable. It also provides a record of critical fund data, which would enable the firm to change fund administrators if needed.

Additionally, a shadow accounting resource can ease the operational and logistical friction caused by building additional internal infrastructure to launch a new fund. It takes time to hire the right people and to identify and implement the systems required to perform the work correctly, not to mention the additional cost of both. An outsourced shadow accounting solution can help a firm scale its operations and meet the changing needs of an investment management firm cost effectively.

An accurate shadow accounting program provides investment management firms vital autonomy and mobility and mitigates operational risks.

Choosing the right solution

Though outsourced shadow accounting can be an invaluable tool for hedge funds, not all providers are created equal. Shadow accounting can only be as high quality as the experts delivering it.

An ineffective shadow accounting platform risks a buildup of errors and inconsistencies that pose a risk to the firm’s operations and could waste time and resources. On the other hand, the right shadow accounting team will do the work required to determine the source of discrepancies between the shadow accounting and the administrator’s records and correct them.

A high-quality provider will act as an extension of the investment managers’ middle and back-office teams, providing proactive service and oversight of the fund administrator’s work. Deep expertise and support of complex global strategies and fund structures are needed to account for all entities.

How Sanne can help

Sanne provides institutional quality solutions that investment managers and investors have grown to rely upon while delivering a boutique approach. By engaging Sanne for shadow accounting services, hedge fund managers benefit from reduced cost and risk, increased efficiency, and optimized operations.

Our team of hedge experts can provide you with the coverage required to meet challenges driven by firm growth and investor requests.

For additional information, or to discuss any of the topics highlighted above, please get in touch with Adrian directly.

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