The next stage in shadow accounting

Shadow accounting

The next step in the fund administrator relationship

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As partial shadowing emerges as an alternative to full shadowing, it's important for managers to understand what's driving the move, the functions where it makes sense to discontinue shadowing and the best way to make the transition.

Drivers of partial shadowing

Ultimately, the move to partial shadowing is strategic. It frees up resources, enabling firms to sharpen their business focus, build stronger portfolio management teams and enhance their marketing capabilities.

The cost savings from reducing redundancies and scaling back operational and IT expenses can be significant.

At a day-to-day, operational level, there are also several specific factors making this new strategy viable now:

  • Operations for once-esoteric strategies such as illiquid asset trading and credit investing have matured and standardized
  • Fund administrators are investing heavily in their operations, making it possible for them to take on more back-office and middle-office tasks
  • SOC 1 reports from auditors give fund managers some assurance that there are sufficient controls within the fund administrator’s operations
  • Responding to new regulations such as FATCA and Form PF requires more experience, making it more expensive for funds to shadow these tasks in-house

Ultimately, the move to partial shadowing is strategic. It frees up resources, enabling firms to sharpen their business focus, build stronger portfolio management teams and enhance their marketing capabilities.

What types of shadowing can be discontinued?

If a manager seeks to adopt a partial shadowing strategy, the first step is determining which activities are not core to the fund’s value proposition or are standardized sufficiently to not require double-checking.

The following back-office and middle-office tasks are good candidates for transitioning from duplicative shadowing to strong oversight:

  • Reconciliation
  • NAV calculation
  • Fund statement administration
  • Collateral management
  • Certain treasury services

By contrast, funds should retain full control of shadowing around portfolio management, capital raising, marketing, compliance and risk.

Making the transition

The move to partial shadowing must be planned carefully. Before making any changes, funds must assess the current states of their systems, technology, data and related infrastructure.

After the assessment, it’s critical to develop a future-state operating model, which will then make possible a solid road map for the transition.

It’s also crucial to reassess the relationship between the fund and its administrator. The fund needs to determine anew whether the administrator is up to the job.

Finally, it’s important to avoid a “Big Bang” approach in which a partial shadowing strategy rolls out all at once. Using a phased approach allows the fund’s operating model to evolve in tandem with the shadowing relationship.

Fund managers should also avoid outsourcing a broken process, hoping that the administrator will fix it. They should make sure their systems and processes are in order before outsourcing.