Hedge fund accounting, down to the series

An open-end fund's hard problems are all about fairness between investors who arrived on different days, and most of them come down to the high-water mark.

Solutions · roughly 6 minutes

Fairness between cohorts is the whole game

Two investors in the same strategy, one who subscribed in January and one in July, should not pay the same incentive fee on the same year. Every mechanism an open-end fund uses, series accounting, equalization, the equalization credit and depreciation deposit, exists to fix that one unfairness, and each of them is fiddly enough that it is usually implemented in a spreadsheet.

High-water marks that survive the year

A high-water mark is easy to compute and easy to lose. It has to survive a partial redemption, which reduces the balance it applies to without resetting it. It has to survive a transfer between investors. It has to survive a restatement of a prior period, when the performance it was measured against changes underneath it. Get any of those wrong and an investor either pays twice for the same gain or never pays for it at all.

That is one of the fifty-seven invariants checked daily against live funds: every high-water mark survives redemption, transfer and restatement. Not a unit test over a fixture, an arithmetic check against real money.

A fund dashboard showing NAV as of a selected period, position value, fees accrued and operating cash against its floor.
NAV as of the period actually selected. Fees accrued inception to date, and the cash the fund can spend against its configured floor.
A per-investor allocation run with each investor's capital roll-forward, profit and loss attribution and rate of return.
Each investor's roll-forward, gross to net. Opening, flows, profit and loss attributed before and after fees, ending, and a rate of return on both bases with quarter and year to date geometrically linked. The gap markers are deliberate: a period an investor was not in is not silently linked through.

A fund of funds is a book, not a list

Underlying fund positions carry a cost basis, an unrealized gain and a valuation date per manager. When a manager sends an estimate and later a final, the true-up is a correction with its own record rather than an overwrite, and it is seal-safe: a closed period can be corrected without breaking what was already reported.

Portfolio holdings for a fund-of-funds: six named underlying managers with units, current value, cost basis and unrealized gain.
Six managers, each with its own basis and unrealized position. The date each was last revalued sits on the row, because the age of an input is part of the number.

The cash underneath

Subscriptions arrive as receivables and become cash when they clear. Redemptions leave as payables. Treating them as cash the moment they are recorded is how a fund's operating cash goes quietly negative on paper while the bank account is fine, and it is a surprisingly common defect.

A cash movements blotter with settled movements, each portfolio transaction paired with its GL-derived counterpart.
Every movement carries its source, counterparty and settlement status. Each portfolio transaction sits beside the GL-derived movement it produced, which makes a cash break a comparison rather than an investigation.

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