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Hedge fund accounting is an important part of any hedge fund, because it is the mainstay of financial responsibility for a fund. Hedge fund accounting is how a company compiles all of the brokerage statements that reflect on the fund. Everything the fund invests in and everywhere the fund chooses to place money should be accounted for in hedge fund accounting spreadsheets. This is the best way for the fund to report back to the investors about how the money is growing.
Hedge fund accounting is typically handled by an outsourced version of the same firm that handles the fund itself. Accountants who compile the records are highly specialized and keep track of all portfolio analysis. It has been proposed that hedge funds be forced to hire entirely separate hedge fund accountants to maintain a checks-and-balances system, but it isn't common practice.
Hedge fund accounting also determines the break periods for a hedge fund. This is when the principles and partners will be paid for the monies made by the fund over the year. This is when many people reinvest the payout in the fund if it is performing well. The payouts at any given break period can be readjusted and investors can choose to remove any and all monies from the hedge fund.
Hedge fund accounting costs a fund 1 percent a year. This fee was fixed to manage the cost of what this service would be in accordance with the fund itself. The payment for accounting is due quarterly, on the first day of the month in January, April, July, and October.
The output of hedge fund accounting is known as the net asset value, or NAV. There are other accounting reports put out for investors, and some hedge funds offer other reports monthly, but the NAV must be provided once a year. In addition to the NAV, the fund should provide investors with annual income tax reports for the investor to properly file earnings with the U.S. Internal Revenue Service.
The NAV is used to build a hedge fund performance record. These are the records investors use to decide what hedge funds to invest in. This is why hedge fund accounting has been called into question when there have been inconsistencies between the NAV and the actual fund. This has furthered the call for non-biased, third-party accounting, even though it is likely to cost a fund more in the long run.