Multi-Series & Equalization Accounting

Historically, hedge funds typically provide for some form of performance-based compensation to the investment manager of the hedge fund. This has generally been a percentage of the increase in the gross assets over the prior high water mark. Although relatively simple to understand, there were certain situations where individual shareholders would suffer a fee not in line with performance and, consequently, the investment manager would receive either too large or  too small a fee relative to the individual shareholder's performance.   This inequity arose because the performance fee is calculated at the fund level and distortions occur when the subscription cycle differs from that used for calculating the performance fee.

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In order to counter the inequality of this performance fee calculation, most hedge funds will track and calculate performance fees using a range of equalization methods to try to ensure that each shareholder pays a performance fee which equates to the performance of their investment.  There are two common methods  used  to  achieve  'equalization'  within  a  hedge  fund;  these  are  series  accounting  and consolidation method and 'traditional equalization'.

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Series or Multi-Series Accounting is used by fund managers which issues multiple series of shares for their fund, not necessarily with the same NAV. Typically, a monthly dealing fund would issue a new series of shares for all investors that invested each month. The fund would therefore contain share classes XYZ Fund - Jan 2012 Series, XYZ Fund - Feb 2012 Series or sometimes called Series A, B, C and so on. This makes it very straightforward to calculate performance fees.

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In Equalization Accounting all the shares of the fund have an equivalent NAV. When new shares are issued or dilution takes place a small number of new shares is assigned to current investors to maintain the value of their investment despite the drop in NAV of the individual shares.

 

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Fundtec’s Service Deliverable

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Our deliverables consists of broad range of activities based on scope of engagement ranging from preparing baseline calculation reports to calculation of NAV at investor level. We also help clients to design checks and reconcile investor allocations with investor statement before they are published to investor.