Fund Accounting

Fund accounting, in the investment industry, is the work of maintaining the books and records of an investment fund and calculating the value of its shares or units. The fund accountant records every trade, income receipt, expense and investor transaction, values the portfolio, and produces the net asset value at which investors buy and sell. The same records support the fund's financial statements, regulatory returns and tax reporting.

The term is also used in the public and non-profit sectors for a system of accounts that tracks restricted pools of money separately; this entry covers the investment fund sense. Fund accounting is usually carried out by a fund administrator appointed by the fund or its management company, and it is one of the core services within fund administration. Some large asset managers keep their own shadow books to check the administrator's figures.

A fund is a pool of assets owned collectively by its investors, so its accounts must show at every valuation point what the pool is worth and how that value is divided. The main tasks are as follows.

• Portfolio accounting. Purchases, sales, corporate actions and derivative positions are recorded, with cost and tax lots maintained for each holding.
• Income and expense accruals. Bond interest, dividends, management fees, custody and audit fees are accrued daily so that each day's price carries its fair share.
• Valuation. Each asset is priced using market quotes, vendor prices or, for illiquid assets, a model or an appraisal approved under the fund's valuation policy.
• Capital activity. Subscriptions and redemptions received by the transfer agent are booked as changes in shares outstanding.
• Reporting. The accountant prepares the price, the trial balance, financial statements and data for regulatory filings.

For a daily-priced fund the cycle runs to a fixed timetable. After the dealing cut-off, the accountant captures the day's trades from the manager, loads prices at the valuation point, applies exchange rates and posts accruals. Total assets less total liabilities gives the fund's net assets, and dividing by the number of shares in issue gives the price per share. Where the fund has several classes, expenses and any share class hedging results are allocated to each class before its price is struck. The steps are set out more fully under net asset value calculation.

Before release, the price passes through checks: movement against the benchmark and the previous day, stale or unchanged prices, large price differences between vendors, and cash and position breaks. The approved price is sent to the transfer agent, distributors and data vendors. Adjustments that protect existing investors from dealing costs, such as swing pricing or a dilution levy, are applied at this stage.

The accounting records are only as reliable as their agreement with the outside world. Cash balances are reconciled to bank and custodian statements and securities positions to the fund custodian, normally every day. Derivative positions are agreed with brokers and counterparties. Unsettled trades, unpaid income and tax reclaims are tracked until cleared. In European funds a depositary has a duty of depositary oversight that includes checking the valuation process.

An error in the price harms either incoming or outgoing investors. Funds therefore set a materiality threshold, often expressed as a percentage of the price, above which the error must be corrected and investors compensated; the process is described under NAV error correction. Administrators are commonly subject to independent control reports on their processes, which fund boards and auditors rely on.

Open-ended retail funds, such as UCITS and US mutual funds, are priced daily and are the most automated. Exchange-traded funds add the publication of portfolio composition files and the handling of in-kind creations and redemptions. Hedge funds are usually valued monthly and require the calculation of a performance fee, often with equalisation so that each investor bears the right amount. Closed-ended private equity and private credit funds are accounted for at the level of each investor's capital account: commitments, capital calls, distributions and carried interest are tracked through a waterfall, and valuations are typically quarterly.

A fund's statements are prepared under the accounting framework of its domicile, commonly IFRS, US GAAP or a local standard for investment funds, and are audited each year. Most investments are carried at fair value, with gains and losses passing through the fund's result. Regulators set rules on valuation, pricing frequency and error handling, and hold the fund's board or management company responsible even when the work is outsourced.