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.