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.

Why reconcile

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

1. 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.
2. 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

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.