Fund Reconciliation: A Comprehensive Guide

What is fund reconciliation?

Fund reconciliation means comparing records between your internal system and custodians, brokers and fund administrators to ensure everyone has the same data. Data to be reconciled can be transactions, cash, positions, corporate actions, P&L and NAV. If all sources match each other, the data is likely correct.

Reconciliation diagram - light bg

Why reconcile

Here are two examples of what incorrect data can lead to:

Incorrect NAV
If your NAV is incorrect, you might have to correct it later, which is expensive and a potential reputational hit. Early fund accounting reconciliation avoids this.
Settlement failures
Incorrect trade information at the custodian can lead to settlement failures, which are costly in terms of time and money. Trade and position reconciliation avoids this.

Avoiding these kinds of issues is why investment reconciliation is essential.

The goal is to capture errors before they become problems. Our article about position reconciliation lists examples of what can go wrong.

Less tangible benefits of solid reconciliation processes

Reconciliation is valuable even if your admin’s NAV is always correct and trades are always delivered for settlement.

Reconciliation, especially when conducted early, eliminates the need to resolve discrepancies later. For example, if you catch a transaction tax difference, it avoids dealing with a cash mismatch later (even if the settlement is successful).

Another benefit of reconciliation is proving to investors that you do it. As institutional investors perform their due diligence, reconciliation processes can be a direct requirement (or indirect via a “shadow NAV” requirement).

Front Office benefits of correct data

Early reconciliation ensures that portfolio managers have reliable positions and cash balances. When they rebalance portfolios, they can do so more confidently and keep a lower cash buffer. A lower cash buffer creates operational alpha. You can check out our online operational alpha calculator to see the potential AuM and profitability impacts of lowering your cash buffer.

Fund reconciliation process

Transaction reconciliation

What trade recon entails: Verify that all parties capture trades correctly, whether initiated internally (e.g. orders) or externally (e.g. FX-hedges).

Data to reconcile: Trade quantity, execution price, commission, other fees, taxes and allocations.

Importance: The primary reason is to avoid settlement failures. A secondary reason is to catch issues when they are easier to find. For example, a fee or tax mismatch will appear in the cash reconciliation later, but it will be easier to find and resolve in the trade recon.

Corporate Actions Reconciliation

When to do this: Sometimes, the custodian will be the only source of corporate action data. In this case, it’s still relevant to reconcile because what was projected a week in advance might not be what the custodian records (e.g. on the pay date for a dividend).

If your internal systems take corporate action from multiple sources, such as the custodian and market data provider, reconciling those sources could be a good idea.

When not to reconcile corporate actions: The corporate actions always impact positions (quantity, P&L, etc) or cash – so any discrepancy will be caught in those recons anyway.

Positions / Holdings recon

What it entails: Confirm that the number of holdings matches.

Data to reconcile: Instrument held (listed or OTC), currency, quantity/notional, valuation, market value (local current), acquired price or tax lots.

Importance: The position reconciliation is a catch-all for any issue that could’ve caused a position to be incorrect. It’s a great tool to avoid having to check all reasons individually and instead just answer the question, “Did we get the result correct?”. If not, an investigation can start to determine why there is a mismatch.

Reasons for mismatches: Some examples include trade information not delivered to the custodian, differences in corporate actions, market price discrepancies, and using different identifiers.

Cash balances

What it entails: Cash reconciliation in fund accounting is a check of the internal cash view, compared to the custodian (settled cash) and the fund administrator (trade date cash).

Importance: There are two main reasons to reconcile cash:

A “catch-all” layer for anything that affects cash.
- From recon to admin: to ensure NAV accuracy and to catch unsettled cash (before settlement fails).
- From recon to custodian: to ensure the settled cash aligns with expectations. This can catch things like a dividend that should’ve been paid but wasn’t.
Ensure that the cash view portfolio managers see is as up-to-date and accurate as possible. With a better cash view, they can keep a lower cash buffer and thus increase performance.

Profit & Loss

What it entails: Confirm that the profit or loss from holdings, fees and taxes matches between the fund administrator and the intern system.

Importance: If the cash and position recon match, we know the portfolio aligns with the fund administrator. Adding P&L, we reconcile the last component that goes into the NAV. So, with this step, we’ve completed a full reconciliation of all portfolio data relevant to NAV and settlement purposes.

Net Asset Value

What it entails: NAV reconciliation involves verifying that the total value of the fund’s assets minus liabilities is accurately calculated and reflects the actual value of the portfolio.

Importance: The NAV is the fund’s value, so it’s tempting to conclude it’s the most essential reconciliation. We argue it’s the least important and you might not have to do it. If the 5 recons are performed and match, the NAV will also match. If you instead reconcile the NAV directly (skipping steps 1-5), it will be challenging to understand why it breaks and where to start investigating. This is why we recommend these 5-6 reconciliations in this order.

Different types of funds

Mutual funds and hedge funds need to go through the 6 steps above, but there are some nuances.

Mutual fund reconciliation

The mutual fund reconciliation process is generally characterised by:

Daily reconciliation, or sometimes even multiple times per day
Usually simple asset classes, at least with an ISIN available (there are many exceptions, however)
Often done across many funds at once
Often, many counterparties (multiple custodians, brokers or even fund administrators)

Hedge fund reconciliation

When reconciling hedge funds, there are some other commonalities:

Strict “Shadow NAV” requirements from investors
Sometimes monthly rather than daily
Holdings can be more complex, either OTC or short positions via swap agreements that affect P&L and cash (financing)
Often, fewer funds (sometimes just one) and counterparties

Turn fund reconciliation into reality

In practice, reconciliation isn’t “just” about comparing data. Getting the data into a reconciliation system can be even more challenging. You get data delivered in multiple files, sometimes with overlapping data and in various formattings.

When you investigate fund reconciliation software, we recommend focusing at least half of the evaluation on the data ingestion functionality as the reconciliation functionality.

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Andreas Holtz

Experienced client relations professional with a proven track record of building and nurturing successful client relationships, bringing a strategic and customer-centric approach to every interaction.