To verify the accuracy of net asset value (NAV) and other calculations completed as part of a Fund’s quarterly reporting, many fund managers maintain a second set of financial records—a process known as shadow accounting. Whether this is done in-house or outsourced, firms often believe the process is necessary to avoid costly mistakes from their fund administrator. It’s hard to think of any other function that funds decide to pay for twice. Although these firms view shadow accounting as an industry best practice, it represents a faulty assumption: namely, that all fund administrators offer the same attention to detail.
Smart firms know there’s a way to avoid wasting resources on shadow accounting. That’s because they spend time choosing a trustworthy partner at the outset, eliminating the need for an extra layer of administration. In this summary, we will provide some context for the rise of shadow accounting and explore how to select a reliable fund administrator, making shadow accounting unnecessary.
As the regulatory environment became increasingly complex, so did investor requests. This created significant cost and efficiency challenges for the internal teams at investment funds. In response to the added strain, back-office teams began relying more on their fund administrator to perform ad hoc requests. This detracted from the fund administrator's core job functions, which led to mistakes. When NAVs were restated, investors became frustrated and lost confidence in the fund manager—to the point where some chose to redeem their investment.
From these concerns, shadow accounting emerged. Some managers began to build in overlapping checks to catch administrator errors which gave comfort to their investors that they were taking additional steps to protect investments but failed to address the underlying problem: They were choosing the wrong partners.
There is a better approach: Instead of catching errors, prevent them from the start by choosing the right partner.
Fund managers deserve an operational partner who creates back-office efficiencies, not additional work. Your fund administrator should allow your firm to focus on areas that deliver the most value, such as establishing strong relationships with investors and maximizing portfolio performance.
By hiring a partner with exceptional attention to detail, firms can avoid the extra costs and increased time commitments of shadow accounting. Let’s examine some important considerations to guide you toward the right fund administration partner:
When firms focus on choosing the right fund administrator, they pave the way for greater success. As fund managers work closely with a trusted partner, they gain the ability to scale and avoid unnecessary distractions from their core competencies. Highly experienced fund administrators also increase investor confidence. When investors know that skilled professionals are dedicated to a process and a team that will deliver accurate results, they no longer see the need to waste time and money on redundant processes.
By hiring a reliable fund administration partner to collaborate with your firm, you can increase investor satisfaction and give fund managers the freedom to explore new strategies and build relationships with LPs—instead of wasting time and unnecessary costs on shadow accounting.
