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.
Here are two examples of what incorrect data can lead to:
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.
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).
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.
Mutual funds and hedge funds need to go through the 6 steps above, but there are some nuances.
The mutual fund reconciliation process is generally characterised by:
When reconciling hedge funds, there are some other commonalities:
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.