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Visualizing Equalization Accounting for Alternative Investment Firms


After adding the equalization methodology to the Cogency partnership accounting module, we have thought a lot about the best way to explain, document and present both the concepts and the specifics of this feature.

When speaking with accountants, or programmers who build accounting systems, long pages of verbiage, formulas, and Excel-proofs seem to do the trick. Much has been written about the equalization approach to investor accounting in offshore hedge funds and Custom House has created an excellent paper about the subject.

But to the more conceptual thinkers — the portfolio managers, analysts, implementation architects, documenters and others who need a visceral understanding of the problem if not an entirely mathematical one — the heartache and the glassy eyes kick in way before the formulas sink in. As a result, our product team built a visualization to illustrate the equalization adjustment problem and solution. While it is not nearly as detailed as the above cited papers, it worked quite well to convey the general context of the problem.

Equalization Adjustment

The HWM/Jan1 intersection shows the fund HWM at the beginning of the cycle.
The Date Of Purchase/Above and Date Of Purchase/Below intersections show two different examples of the NAV on the day that a subsequent investor comes into the fund.
The Purple triangle shows Equalization Credit for the above-water subsequent investor, and how it diminishes as the NAV goes back down to its HWM.
The Blue triangle shows the Contingent Redemption for the below-water subsequent investor, and how it increases as the NAV goes back up to its HWM.

Once we explain the legend, this illustration has served as a good tool for explaining the rational and the general concepts of a fairly archaic and complex accounting methodology to our target audience. We are happy to have this as a tool in our tool-chest, knowing that when asked for it, we also have the detailed Excel proofs to back it up!

If you are in search of a partnership and shareholder accounting solution for both US and European based hedge funds or fund of funds, supporting all currencies and a myriad of fee structures, built by a team who spends a lot of time thinking about conceptual visualization, get in touch with us!