What are alternative investment funds?

Alternative investment funds, including hedge funds, private equity funds, and real estate funds, are unique investment strategies with the potential for high returns. These funds often engage in complex financial transactions and can create exposure to significant risks. It’s critical for fund managers to have a clear and accurate picture of their financial position at all times and this is where general ledger accounting comes in.

What is the general ledger?

A general ledger is a central record-keeping system that tracks all financial transactions within a business. It’s the foundation of an organization's accounting system, providing a comprehensive record of all financial activity and serving as the basis for financial reporting and analysis.

Why is the general ledger important?

In the alternative investment fund industry, general ledger accounting is essential. A well-maintained general ledger system ensures the long-term success of any hedge fund or private equity fund by providing transparency, compliance, risk management, and performance evaluation. Here’s why these reasons are important:

• Transparency - A well-maintained general ledger allows fund managers to see all financial transactions in one place, providing a clear and transparent view of the fund's financial position. This is especially important for alternative investment funds, which often engage in complex and risky investment strategies that can be difficult to understand without proper accounting records.
• Asset Protection - When the transactions are recorded in a general ledger system, the assets are tracked via the two entry accounting system, and not left to memory of the accountant. Similarly, the liabilities are tracked and not overpaid.
• Compliance - Alternative investment funds, including private equity funds, are subject to a variety of regulatory requirements, including the need to provide accurate and timely financial reports to investors and regulators. A robust general ledger system is crucial for ensuring compliance with these requirements, as it allows fund managers to easily track and report on financial activity.
• Risk Management - By providing a comprehensive view of the fund's financial position, a general ledger can help fund managers identify and manage potential risks and make informed investment decisions. For example, if a fund is heavily invested in a particular asset class or sector, the general ledger can provide insight into the potential impact of market fluctuations on the fund's overall performance.
• Performance Evaluation - A general ledger is a valuable tool for evaluating the performance of an alternative investment fund. By tracking financial activity over time, fund managers can identify trends and patterns that may indicate the success or failure of particular investment strategies. This information can be used to make adjustments and improve performance going forward.

What are the risks of not having an accurate general ledger?

A full and accurate general ledger is an important tool for financial reporting and auditing. If a fund administrator is not using full general ledger accounting, there are several risks that may arise during an audit. Here’s what you need to know about these risks:

• Incomplete/Inaccurate Financial Statements - Without a complete and accurate general ledger, the financial statements prepared by the fund administrator may be incomplete or inaccurate. This could lead to incorrect conclusions being drawn by auditors or others who rely on the financial statements.
• Increased Audit Risk - If the general ledger is incomplete or inaccurate, it may be more difficult for auditors to test the accuracy of the financial statements and obtain sufficient appropriate audit evidence. This can increase the risk of the audit not being conducted in accordance with auditing standards, which could result in the audit report being qualified or adverse.
• Reputational Risk - If an audit reveals that the fund administrator has not been using full general ledger accounting, it could damage the reputation of the fund and the fund administrator. This could lead to a loss of investor confidence and a decline in the value of the fund.
• Legal/Regulatory Risks - If the financial statements of a fund are found to be inaccurate or misleading due to a lack of full general ledger accounting, the fund and its administrators may be subject to legal and regulatory action. This could result in fines, penalties, and other negative consequences.
• Loss or Misappropriation of Assets - when the fund’s assets are tracked in an excel file or in a list somewhere instead of a general ledger accounting system, these may be lost and fund’s expenses/liabilities may be overpaid.

How do I verify that my fund administrator is using full general ledger accounting?

One way to verify that your fund administrator is using full general ledger accounting is to ask for a copy of the fund's general ledger and to review it for completeness and accuracy. It should include all revenues, expenses, assets, liabilities, and equity transactions. If the general ledger provided by your fund administrator is complete and accurately reflects the financial activity of the fund, it’s likely that full general ledger accounting is being used.

You may also want to ask your fund administrator about their accounting processes and procedures to ensure that they have appropriate controls in place to ensure the accuracy and completeness of the general ledger. It can also be helpful to seek the advice of an accountant or other financial professional with the ability to review the general ledger and provide an opinion on whether full general ledger accounting is being used.

How can Formidium help?

If you're an alternative investment fund manager looking for a reliable and efficient way to manage your general ledger accounting, consider using Formidium's Seamless Solution. Our cloud-based, transparent, full general ledger fund accounting system is designed specifically for the needs of alternative investment funds and offers advanced features such as automatic import of transaction data, customizable reporting, and expert tax planning advice.

Contact us today to learn more about putting Formidium’s Seamless Solution to work for you.

Written by Shalin Madan

Shalin is the Founder and Chief Investment Officer of Bodhi Tree Asset Management. He has held senior roles with investment management firms including a registered investment adviser for a major family office. Shalin has personally supported multiple highly successful Silicon Valley-based tech startups as an investor and board advisor.

shalin.madan@formidium.com