Our performance numbers don't agree!

Last week I had a call from a client who said that the returns they calculate don't match those provided by the hedge fund. How can this be?

Hedge fund performance should be pretty easy to handle: once we have the monthly valuations, cash flows are typically restricted to being once a month (on the last or first day), so it's quite simple to do the math. And so, what might be going on?

Well, our client said that they recognize flows when they occur! This could be the problem, right?

In wanting to get the money to the hedge fund in time that it's available, many of their clients will wire funds a few days early, but the hedge fund pretty much (as I understand it) ignores the money; (i.e., just lets it sit outside the corpus of the fund), until they're ready to bring it in: as a partnership, they do partnership accounting, where they calculate an end-of-month NAV (net asset value), and then issue new shares based on this value and the money being deposited (or, in the case of withdrawals, reduce the number of shares). If our client treats a flow as an intra-month event, using either Modified Dietz or a daily measure (where they simply carry the fund value from the start of the month to every day in the month (since daily values won't usually be available)), differences can occur, yes? There can be other reasons for differences in returns, but this seems to be a likely candidate.

My advice: adopt the same method as the fund. For example, if a flow actually occurs on November 28, but the hedge fund won't recognize it until November 30, having the return reflect the flow on the 28th isn't going to help when trying to match up with the fund. The fund is not doing anything with this cash, so treat the flow as if it occurred on the 30th, just as the fund will. As with all of my posts, I welcome your thoughts.