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Hedge Fund Accounting How To

By Edited Jun 7, 2014 0 0

Hedge Fund Accounting - A How To

 I started in the Hedge Fund Accounting world in 2007. I have spent the last 5 years learning the ins and outs of Private Equity and Hedge Fund of Fund accounting.  For those of you interested in a career in accounting, but have no interest in public accounting, this is for you.  This article will detail the daily ins and outs of a Hedge Fund of Fund accountant. Keep an eye out for subsequent articles which will cover where to look for jobs if you have an interest in this line of work.  I will also provide salary guidelines as well as the possible career paths for this particular line of work.

 So what are the day to day responsibilities of a Hedge Fund Accountant in the Fund of Fund world.  Well, it makes sense to provide a little background on what a Fund of Fund actually is.  Fund of Funds are simply, hedge funds that invest in other hedge funds.  In doing so, they are able to expose their investor base to a wider range of investment strategies and products than a direct traded strategy hedge fund. 

 Now that you know what fund of funds do, you’re probably wondering what the job is like.  Well, lucky for you, the hedge fund valuation cycle is monthly, so your day will not be the same from day to day and week to week.  This is the good news.  The bad news is that the work is generally cyclical.  You will have weeks during the month when you are swamped with work, and others when you are working 9-5. 

 Accounting is historical in nature, and it is no different in the hedge fund world.  The funds will be valued one month in arrears.  It will be your job to “strike a NAV.”  NAV stands for Net Asset Value, which is the total value of the fund once all income and expenses are taken into account for the month.  This value will determine whether the fund incurred positive or negative returns, so it is very important to get it right. 

 The hedge fund accounting process kicks off with the accountant booking the fund’s cash flows for the month.  Anything that was received or left the fund’s bank accounts must be memorialized with a journal entry.  Each journal entry tells a story and will ultimately affect the NAV of the fund

 The next step is to book monthly accruals.  These accruals will be based on the total expectation of expenses in an expense bucket over a year.  This is called accrual based accounting which is standard in the hedge fund world, and is used to provide the most accurate monthly net asset value by smoothing out the expenses for large expenditures over a twelve month period.

 

Once the accruals are booked, it’s on to performance.  The performance of the fund is based on the performance of the underlying hedge funds within which they invest.  This data is gathered through the delivery of monthly statements which provide ending balances and profit and loss for the month.  All of this data is entered into the accounting system, which should produce the profit and loss for the period .

 

The final piece to the puzzle is investor and investment activity for the month.  Any subscriptions into the fund by new investors must be captured as a “beginning of day” transaction, and any redemptions from the fund as an “End of Day” transaction.  The same rules apply for subscriptions into new underlying hedge fund investments and redemptions from underlying hedge fund investments. 

 

Once everything is booked, you should be able to run a Trial Balance or Balance Sheet and see the ending Net Asset Value for the fund.  See, Hedge Fund Accounting isn’t that hard, is it?

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