A few hedge fund managers asked me this question: does my hedge fund need monthly or quarterly accounting? The answer: it depends, and below are four factors to consider for the frequency of your hedge fund administration work:
1. Terms in the legal documents;
2. Actual capital activity;
3. Investor expectation;
4. Benchmark comparison.
First check your legal documents such as limited partnership agreement. If it says that monthly accounting records will be available for investors, keep that promise.
Another important legal term is the capital contribution/redemption. If your fund allows monthly capital contribution and redemption, chances are your fund needs monthly accounting. With partnership accounting, all income and losses shall be allocated to partners based on the capital percentage. Whenever there’s a change in capital percentage, with or without new investors, the net income/loss for the following period shall be allocated based on the new capital percentage among all investors.
However, some new funds only have a few capital contributions at the time of the inception, afterwards there are no capital activities for several months or even an entire year. In this case, quarterly or maybe even annual accounting becomes an option. <Whether annual accounting is appropriate is more complicated and involves calculations of management fees and net asset values, we discuss this possibility with fund managers based on their individual cases. We will only cover monthly/quarterly accounting in this article.>
When quarterly accounting is an option and there are no legal requirements for monthly accounting, it’s best practice for managers to confirm with their investors that quarterly accounting reports are ok. Understanding and meeting, if not exceeding, investors expectation is key to investor satisfaction.
Last but not least, when you present your fund performance alongside with benchmarks, is a monthly or quarterly performance track record more appropriate? Consider investor preference and the time sensitivity of benchmarks for the investment period.
*****Form PF requirement:
SEC proposed rule would require RIAs that advise one or more private funds to to file Form PF with the SEC, and CFTC proposed rule would require CPOs and CTAs to file the form with SEC if they’re also an RIA.
What does it mean for accounting frequency? Each private fund needs to disclose fund performance (before and after fees/charges) by month. Proposed effective date is 12/31/2011 and final ruling is anticipated to come out in August. ****
Hope the above helps you decide whether monthly or quarterly accounting is more suitable for your hedge fund. If you have any questions, feel free to call Amy Zhang, our managing member, at 415 370 6208.
We, at Affinity Fund Services LLC, provide hedge fund accounting, prepare financial statements with footnotes disclosures and disbursement letters for California registered investment advisors. We also provide emerging managers with consultation services to expedite the start-up process. Our other popular articles among fund managers:
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