Shareholder Accounting System Snapshot: Processing Series of Shares

Jan. 10, 2012 - PRLog -- Introduction
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Chris M. DeNigris

Many hedge funds use the series of shares methodology because it is the simplest and most straight- forward of the equalization methods.
When using series of shares accounting, the fund uses multiple “series of shares”, one for each period of issue, each with a different NAV per share and high water mark.  Incentive fees are then calculated separately for each series within the class, based on their individual performance to date.  The starting series of shares is often referred to as the “lead series” or “beginning series”, and it’s issued at the fund’s launch.  The goal is to consolidate each of the subsequent series issued into one series, typically the lead series. For this to happen, an incentive fee needs to have been paid for each of the series, including the lead series, in other words, they need to be in a gain position.  
The series methodology is designed to eliminate the complexity of equalization for investors in the same share class, however it does come with additional fund accounting and administration work.  It is possible, that by year end you have twelve separate series in issue.  This could be one disadvantage of this approach, especially if the fund is down at year end, then you could have even more series being issued, before the next accounting period is finalized.  You’re also not able to publish a single NAV per Share, because each Series has its own NAV, which could be confusing to some shareholders if they make several investments into the fund over a period of time and end up with multiple NAVs.
To simplify this, the use of a shareholder accounting system should allow administrators to create series groups and use a template to create a new series of shares based upon an existing series of shares.  Then at the end of a calculation period at which an incentive fee is paid, the series should be able to be consolidated or 'rolled up' into the lead series or any other profitable series within the fund class automatically by the system.  Managers prefer roll ups into the series with the highest NAV, as investors always prefer to see the NAV going in one direction.  The results of the series consolidation process would then be available in the client reporting that can be distributed electronically to investors.
The shareholder accounting system becomes even more powerful when used with a hierarchical matrix database. This advanced environment can store individual lot data; any single fund ID can represent a multi-series class without the need for individual fund ID for each series of shares.   In other words, the user can set up one fund to house all series.  All investments are issued at the initial NAV of 100 but in the background the system calculates the ‘actual’ figures based on a weighted average method.  Of course, you would still have the ability to consolidate for investor purposes.
This architecture results in several advantages for the fund accountant.  No duplication of parameters across multiple fund IDs, series that are below the HWM are kept in the same fund ID and can be viewed together with profitable series for easier tracking of original transaction history, which is very useful for lock-up situations.  
Conclusion
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There are systems on the market capable of supporting Multi-Series method.  Koger for example provides a robust suite of Series Methods within its NTAS software to accommodate the accounting, processing, and reporting of such investment vehicles. We have consulted with our clients, which include leading administrators, investment managers, accounting firms and lawyers to develop the most accurate and thorough series functionality in the industry.  It automates the majority of series fund accounting methods and processes, significantly reducing the possibility of manual errors.  It also has rich functionality around compliance (document tracking, blacklist, and full audit trails), fee processing (trailer, tiered, and loads), cash management, and reporting and distribution methods.  All aimed at maximizing operational efficiency and minimizing the risk of costly manual errors.  

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Chris DeNigris is Head of Marketing and Sales for Koger, Inc.  Koger is the world leader in fund administration software- It's flagship product, NTAS, is used by 10 of the 20 largest administrators in the world. With offices in United States, Ireland, Slovakia and Australia, Koger can provide truly comprehensive 24/5 technical support.

Email Chris DeNigris at:  chris.denigris@kogerusa.com
In: http://www.linkedin.com/in/chrisdenigris