by Todd Sloan
One of the most important responsibilities of the fund administrator is to calculate the fund net asset valuation (NAV). Before calculating the official NAV, the fund administrator must ensure the accuracy of the data by way of reconciling the investment manager’s data against that of the prime broker or custodian. Fund administrators are well-versed in the different ways that a NAV should be calculated and the need to agree with investment managers on the methodology to be used before posting an official NAV.
The question is, why does the investment manager need to reconcile the makeup and accuracy of their NAV if a service provider or fund administrator is already performing reconciliation? After speaking with several operations professionals across the hedge fund space, we identified four main reasons why an investment manager should shadow their service provider or fund administrator:
- Pricing Issues
Market value and mark-to-market discrepancies are often the results of inaccurate pricing of assets, especially since most of them are esoteric instruments. These differences come from the investment manager and prime broker failing to use the same data source or valuation methodology.
- Staffing Concerns
In many cases, errors occur when the fund administrator’s staff is unable or unwilling to share the same level of enthusiasm as the investment manager’s when wrangling with the prime broker for the correct valuation. Other NAV errors stem from the fund administrator’s staff improperly accounting for corporate actions, income, expenses and trades.
- Investor Protection
An investment manager may hire a fund administrator to calculate the NAV and reconcile the buckets comprising the NAV, but at the end of the day, it is solely responsible for ensuring the accuracy of the NAV calculation provided to investors. Protecting investors is the most important reason to shadow the fund administrator, and is not a responsibility that can be passed along to someone else.
- Regulatory Requirements
New regulatory requirements, such as Form PF, require investment managers to maintain a clear and consolidated picture of their assets and exposures. Consequently, managers’ Form PF responses must aggregate statistics such as counterparty exposures, the gross notional value of derivative positions, and investor concentrations across multiple portfolios. Shadow reconciliation of books and records can help with this crucial process of verifying the information that will eventually populate Form PF.