Accounting

the calculation of NAV, but it means that financial statements must reflect
current market prices rather than historical cost.
Nonledger Accounting Information
The hedge fund must keep track of a
large amount of data that doesn't fit into the debits and credits of a general
ledger. For example, the fund needs to know how many shares it is long or
short. It probably needs to know the cost basis of individual lots and the
dates the lots were acquired. This data is maintained by a portfolio ac-
counting system and can be passed to position-management routines or
risk management routines, or used for tax reporting.
Maintaining Capital Accounts
The hedge fund must keep track of many de-
tails concerning the ownership interests of the partners investing in the
fund. It is possible to use the general ledger to record some of this informa-
tion. For example, the fund's accountants could establish a unique capital
account for each investor (or even distinguishing multiple lots for in-
vestors). A hedge fund may have hundreds of different investors, so this
could require many separate accounts. In contrast, a corporation may have
only a few capital accounts: common stock, additional paid-in capital, re-
tained earnings. Frequently a hedge fund will establish a capital account
for general partners and a capital account for limited partners. Details, in-
cluding ownership percentages, cost, and tax information, can be pre-
served in subledgers or subsidiary ledgers. A portfolio accounting system
should handle this information automatically, but a hedge fund may also
track this portfolio data in many spreadsheets maintained by hand outside
the general ledger system.
ACCOUNTING AND CONTROL
Perhaps the most important job of any accountant is control. Chapter 11
describes risk management as it pertains to hedge funds, but the account-
ing records, the accountants, and the auditors have a role in corporate con-
trol that differs somewhat from risk management, which focuses on
position risks, financing risks, and counterparty risks.
Accountants are the first line of defense against loss of control. The ac-
counting process must assure that all tickets have been written. The ac-
countants should monitor trading to ensure that all trades are authorized
and consistent with trading limits.
The accountants are responsible for making sure that positions are
fairly valued. These valuations are important to investors entering and ex-
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