By | 2019-07-18T17:20:52-04:00 August 8, 2017|Middle Office|

Shadow Accounting In the private fund space, having a second set of eyes on the books and records of the fund has become standard business practice to make sure the records are error free and mistakes are caught quickly. This practice of having a second set of financial records either internally or at an independent recordkeeper is referred to as shadow accounting.

Outsourcing shadow accounting has become increasingly popular due to the rise in regulations, the Madoff scandal and investor demands for transparency, all of which have led firms to consider engaging a third party to perform shadow accounting.

In a typical arrangement for hedge/private funds, an independent administrator will maintain the official books and records of the fund. While historically the adviser would have kept a second set of books, more and more advisers have been looking to outsource this function to an experienced third-party provider.

Types of Shadow Accounting

There are different levels of shadow accounting that can be performed by a third party.  Partial shadow accounting consists typically of reconciling daily profit and loss, while also verifying cash and position valuations.  By contrast, full shadow accounting involves performing full accounting at the portfolio and investor level.

Reasons to Outsource

There are many reasons to hire a third party to perform shadow accounting services. More and more investors are expecting investment managers to have a “second set of eyes” on their financial records.  Shadow accounting performed by a third party helps ensure that errors made by the fund administrator will be discovered in enough time as to not be visible to an investor.  In other words, errors may be detected and corrected in a timely manner, prior to any data being available to investors.

Also, as investment managers look to strengthen their middle and back office operations, they may want to consider the additional benefits of partnering with a third-party service provider. Some providers have expertise in capturing trades, reconciliation, and price verification to ensure fund data is complete and accurate.

Lastly, outsourcing to a third-party service provider can be a cost-effective option when looking for an independent source. Investment managers who keep shadow accounting “in-house” have significant costs to consider, such as investing in various technology platforms and hiring and training staff to provide the appropriate level of services required by investors.  A third-party service provider has these systems and experienced staff already in place to perform all the required functions of an administrator.

Selecting a Service Provider

Even though selecting a third-party service provider requires a diligent selection process, it need not be a daunting task.  The service provider under consideration should have sound controls, experienced professionals, and robust technology that can provide investment managers the data they need to properly scrutinize that the funds are being reported accurately.

There are many choices when selecting a third-party service provider and Ultimus has the key capabilities that should be considered when choosing a business partner to provide shadow accounting.  Ultimus deploys state of the art technology and employs experienced professionals to provide value-added services for investment managers.

By leveraging Ultimus for shadow accounting, investment managers and their investors can rest assured knowing that accurate information will be reported and they can rely on Ultimus as a trusted business partner. In addition, Ultimus has the processes and procedures in place to handle any issues if, or when, they occur with the official book of record. Working with the Ultimus professionals will feel like working with your own team.  Once you’ve made the decision to outsource and experience the benefits, you’ll wonder why you didn’t do it earlier.

If you are interested in exploring our middle office services please contact Gary Tenkman or Mike Ciotola and we would be happy to discuss in more detail.


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