A hedge fund auditor is a service provider to the hedge fund; the main job of the auditor is to audit the accounting practices of the hedge fund.
During the audit period, the auditor will work with the hedge fund manager to review the hedge fund’s valuation methodology as well as the implementation of that methodology. The auditor will also review the fund’s account statements, including the profits and losses. Usually the auditor will work with the hedge fund administrator as the administrator is the one who has prepared the fund’s financial statements.
Hedge Fund Audit Costs
As with all of the service providers which I have discussed, there is not a one size fits all solution to hedge fund audits. There are three general groups of audit firms and costs
Small audit firm – the small audit firm may be a one to five or more person shop. Like the small administrator, the small audit firm is going to be able to give the hedge fund manager the most one-on-one time and really provide good insight and advice to the manager on his business, in addition to the audit work. The costs for the small audit firm will range anywhere from about $6,000 to $10,000 per year, depending on the nature of the investment program.
Medium sized, boutique hedge fund audit firm – there are a few audit firms that specialize in hedge fund auditing. These firms are well recognized in the industry and are well regarded by most institutional investors. These firms are going to be larger than the small audit firm and may not be able to provide as much face time to the manager. The costs for medium sized firms are going to be in the $12,000 to $18,000 range, depending on the nature of the investment program.
Big four accounting firms – big four accounting firms have large hedge fund audit practices. These firms are very expensive and thus these firms are usually retained by funds with at least $250 million in assets. The costs for a big four accounting firm will probably be at least $25,000 per year.
Funds with less than $250 million should not use a big four accounting firm. One client with $100 million in assets under management used a big four accounting firm and they were put at the end of the line. The accounting firm actually completed the audit late and the client could never get a hold of anyone in the office – our client’s account was a very low priority to this firm. The client made the switch to a boutique hedge fund audit firm and has been happy with the results.
Note on costs. The costs above will generally not include the costs for tax preparation work, which will run extra. Additionally, if the hedge fund invests in certain instruments that are hard to value, the costs may run higher. If you have an unusual asset class, like life settlements, then you will need to discuss your program with your auditor during the offering document drafting process. If there is a master-feeder structure in place, there will be added costs because of the additional entities involved.
Hedge Fund Audit Questions
1. Do domestic hedge funds need to be audited on a yearly basis?
Generally there is no requirement for a domestic hedge fund to have a yearly audit. However, if the manager is registered as an investment advisor with the SEC, then the manager will need to have an annual audit. If the manager is registered as an investment advisor with a state securities commission, the manager will probably need to have an annual audit.
While for some managers an audit may not be required, it is always recommended as investors give great weight to the fact that a fund has an audit. If the fund does not have a yearly audit, it will raise a red flag to potential investors.
2. Do offshore hedge funds need to be audited on a yearly basis?
This will depend on the jurisdiction of the offshore hedge fund. If the hedge fund is based in the Cayman Islands, the hedge fund will need to have a yearly audit and the audit will need to be completed by a Cayman based audit firm. Most hedge fund auditors will have a Cayman based partner which will be able to complete the audit for the fund. This may add a little extra to the cost of the audit.
In the BVI there is no present requirement for a hedge fund audit.
FAQs
Typical duties include: collating, checking and analysing spreadsheet data. examining company accounts and financial control systems. gauging levels of financial risk within organisations.
What does a hedge fund auditor do? ›
A hedge fund auditor is a service provider to the hedge fund; the main job of the auditor is to audit the accounting practices of the hedge fund. During the audit period, the auditor will work with the hedge fund manager to review the hedge fund's valuation methodology as well as the implementation of that methodology.
How much does a hedge fund auditor cost? ›
Annual audit and tax fees range from $20,000 for small, emerging funds to more than $100,000 for large, complex funds. Annual fund administration fees average $24,000 for emerging hedge funds and more than $100,000 for large, complex funds.
What does an unqualified audit opinion mean? ›
An unqualified report concludes that the financial statements of a company are fair and transparent based on thorough research. In an unqualified report, auditors will conclude that the financial statements of a business present its affairs fairly in all material aspects.
What are 3 one of seven principles of auditing? ›
The basic principles of auditing are confidentiality, integrity, objectivity, independence, skills and competence, work performed by others, documentation, planning, audit evidence, accounting system and internal control, and audit reporting.
Who are the largest hedge fund auditors? ›
Hedge Funds
There were 215 firms auditing 14,455 funds compared to 15,262 funds in 2021. Although the market dominance of the Big 4 slightly declined, PwC overtook EY as the leader, auditing 22.2% of this market share.
What are all the roles in a hedge fund? ›
The hedge fund job positions generally include being a junior trader, strategist, analyst, quantitative, software developer, risk manager, and various administrative roles.
How do hedge funds do accounting? ›
Hedge accounting uses one entry to adjust the fair value of a security and its opposing hedge. The purpose of a hedge is to reduce volatility associated with value fluctuations on an investment that is not directly related to the investment's performance.
What is the minimum salary for a hedge fund? ›
While ZipRecruiter is seeing annual salaries as high as $124,000 and as low as $11,000, the majority of Hedge Funds salaries currently range between $45,500 (25th percentile) to $107,500 (75th percentile) with top earners (90th percentile) making $119,500 annually across the United States.
What is the average ROI for a hedge fund? ›
According to BarclayHedge, the average hedge fund generated net annualized returns of 7.2% with a Sharpe ratio of 0.86 and market correlation of 0.9 over the last five years through 2021.
Again, the 2% fee is charged on the assets under management regardless of the performance of the investments under the fund manager. However, the 20% fee is only charged when the fund achieves a certain level of profit. The graphic below should make the compensation structure clear.
What are the four types of auditor opinions? ›
A – The four major types of audit opinion are Unqualified, Qualified, Adverse, and Disclaimer. Of these, unqualified is the most sought after as it expresses the auditor's satisfaction with the entity's financial reporting. The qualified opinion presents an opinion highlighting certain issues.
What is a clean audit? ›
We can express one of the following audit opinions: CLEAN AUDIT OUTCOME: The financial statements are free from material misstatements (in other words, a financially unqualified audit opinion) and there are no material findings on reporting on performance objectives or non-compliance with legislation.
What are key audit matters? ›
Key Audit Matters (KAM) are defined as “Those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period.
What is the 3 step audit process? ›
What are the stages of the statutory audit process?
- Planning.
- Audit and field work.
- Finalisation and presentation of results.
Audit procedures to obtain audit evidence can include inspection, observation, confirmation, recalculation, reperformance and analytical procedures, often in some combination, in addition to inquiry.
What are the three steps in auditing? ›
The process employed by the Office of Internal Audit in performing audits follows three general phases comprising planning, fieldwork, and reporting.
What is an audit usually conduct in 3 steps? ›
(1) a pre-examination or opening meeting with the audite marks the beginning of the process. (2) involves a suitability audit of the documented procedures against the selected reference standard. (3) the auditor examines in depth the implementation of the quality system.
