Fund operations glossary

An accounting book of record (ABOR) is the official, accounting-grade record of a fund’s positions, income, expenses and NAV at each valuation point.

An accrual records income earned or expenses incurred in the period they relate to, even if cash has not yet been received or paid.

Anti-money laundering (AML) refers to the laws, controls and procedures designed to prevent criminals from disguising illicit funds as legitimate assets.

Audit support is the preparation of schedules, reconciliations, confirmations and explanations that a fund’s independent auditor needs to complete its annual audit.

The back office is the set of post-trade functions, including settlement, fund accounting, NAV, investor services and reporting, that complete and record transactions.

A SMART Fund (Specific Mandate Alternative Regulatory Test) is a Bahamas investment fund built on a template approved by the Securities Commission, with proportionate, model-specific regulation.

A bond is a debt security in which the issuer borrows a principal amount from investors and agrees to pay interest (coupons) and repay the principal at maturity.

A business continuity plan documents how critical operations continue, or resume within target times, after a disruption such as a system outage, site loss, cyber incident or staff loss.

A BVI approved fund is a small, lightly regulated open-ended fund for up to 20 investors with a cap on assets, suited to friends-and-family and small managed vehicles.

A BVI incubator fund is a lightly regulated, time-limited open-ended fund for start-up managers, capped in investor numbers and size, that must convert or wind up after its incubation period.

A BVI private fund is an open-ended mutual fund recognized under the Securities and Investment Business Act that is limited to 50 investors or offered only on a private basis.

A BVI professional fund is an open-ended mutual fund available only to professional investors, with a minimum initial investment of US$100,000 for most investors.

A capital account is the record of each partner's economic interest in a partnership fund, tracking contributions, allocations of income and loss, fees and distributions.

A capital call is a formal request from a closed-ended fund’s general partner requiring limited partners to contribute a portion of their committed capital.

Carried interest is the general partner’s share of a fund’s profits, typically 20%, paid after investors receive their capital and any preferred return.

Cash reconciliation is the daily comparison of a fund’s book cash balances and transactions against bank, custodian and broker statements, with every difference investigated and resolved.

A Cayman Islands mutual fund is an open-ended investment vehicle regulated by the Cayman Islands Monetary Authority (CIMA) under the Mutual Funds Act, most commonly registered as a hedge fund.

A chart of accounts is the structured list of every account in a fund’s general ledger, grouped into assets, liabilities, capital, income and expenses, with a numbering scheme.

Collateral management is the process of calculating, calling, posting, receiving and reconciling collateral that secures derivative, repo and financing exposures between a fund and its counterparties.

A collateralized bond obligation is a type of CDO backed by a pool of corporate or sovereign bonds, typically high-yield or emerging-market debt, rather than loans.

A collateralized debt obligation is a structured finance vehicle that pools debt assets and issues tranches of notes and equity with different priorities of payment and credit risk.

A collateralized loan obligation is an actively managed securitization of senior secured leveraged loans, funded by issuing rated debt tranches and an equity tranche.

A collateralized mortgage obligation is a structured security that redistributes cash flows from a pool of mortgages or mortgage pass-throughs into tranches with different maturities and prepayment risk.

The Common Reporting Standard (CRS) is the OECD framework for automatic exchange of financial account information between participating tax jurisdictions.

Corporate actions are events initiated by an issuer, such as dividends, splits, mergers or rights issues, that change a security’s terms, holdings or cash entitlements.

Crystallization is the point at which an accrued performance fee becomes fixed and payable to the manager, after which it can no longer be reversed.

A custodian is a regulated financial institution that holds a fund’s securities and cash in safekeeping, settles trades, collects income and processes corporate actions on the fund’s behalf.

Data lineage is the documented record of where a data point originates, how it is transformed and which systems and reports it flows into.

A distribution waterfall is the sequence, set out in a fund’s LPA, for allocating distributable proceeds between limited partners and the general partner.

Distributions to paid-in (DPI) is the ratio of cumulative distributions a fund has returned to investors to the total capital they have paid in.

A due diligence questionnaire (DDQ) is a structured set of questions that investors use to assess a fund manager’s strategy, operations, controls and governance.

Equalization is a set of accounting adjustments that ensure each investor in a single share class bears a performance fee that reflects their own gains.

Equity is an ownership interest in a company, held as common or preferred shares, entitling the holder to a share of residual value, dividends and, usually, voting rights.

The fair value hierarchy classifies the inputs used to measure fair value into Level 1, Level 2 and Level 3, based on how observable they are.

A feeder fund is an investment vehicle that invests substantially all of its assets into another fund, typically a master fund, rather than holding a portfolio directly.

A fund’s financial statements are its formal annual or interim reports of financial position, performance, capital changes and cash flows, prepared under US GAAP, IFRS or another framework.

FATCA is a US law requiring foreign financial institutions, including most offshore funds, to identify and report accounts held by US persons to tax authorities.

Foreign exchange is the market for exchanging currencies; in fund operations it covers FX trades, currency hedging and translating non-base-currency assets into the fund’s base currency.

A forward contract is a private, over-the-counter agreement to buy or sell an asset at a price fixed today for settlement on a specified future date.

The four-eyes principle requires that a transaction or deliverable is checked and approved by a second, independent person before it is finalized, also known as maker-checker.

A fund administrator is an independent service provider that maintains a fund’s books, calculates NAV, services investors and supports audit and regulatory reporting.

A fund of funds is an investment fund that allocates its capital to a portfolio of other funds rather than investing directly in securities or companies.

A futures contract is a standardized, exchange-traded agreement to buy or sell an asset at a set price on a future date, cleared through a central counterparty with daily margining.

The general ledger is the complete, double-entry record of every financial transaction of a fund, organized by account and used to produce the trial balance and financial statements.

Gross asset value (GAV) is the total value of a fund's assets before deducting liabilities such as borrowings, payables and accrued fees.

A high-water mark is the highest NAV per share (or capital balance) on which a performance fee was last paid; new fees are earned only on gains above it.

A hurdle rate is the minimum return a fund must deliver to investors before the manager earns a performance fee or carried interest.

An interest rate swap is a derivative contract in which two parties exchange interest payments on a notional amount, most commonly fixed-rate payments for floating-rate payments.

Internal rate of return (IRR) is the annualized discount rate at which the net present value of all cash flows into and out of an investment equals zero.

An investment book of record (IBOR) is the manager's real-time record of positions, cash and exposures used to support trading and portfolio decisions.

The ISDA Master Agreement is the standard contract, published by the International Swaps and Derivatives Association, that governs OTC derivative transactions between two counterparties.

A journal entry is a dated record of a transaction in the general ledger, with equal debits and credits, a description and supporting documentation.

Know your customer (KYC) is the process of verifying an investor’s identity, ownership and risk profile before and throughout the business relationship.

A limited partnership is a legal entity with at least one general partner that manages it with unlimited liability and limited partners whose liability is capped at their investment.

A limited partnership agreement (LPA) is the governing contract of a limited partnership fund, setting out partner rights, economics, governance and operating rules.

Litigation funding is non-recourse capital provided to claimants or law firms to pay legal costs, in return for a share of any settlement or award.

A management fee is the periodic fee a fund pays its investment manager, calculated as a percentage of assets or committed capital regardless of performance.

Margin is collateral a fund deposits with a broker, clearing house or counterparty to cover the credit risk of leveraged, short or derivative positions.

Mark-to-market is the practice of valuing positions at current market prices at each valuation point, recognizing unrealized gains and losses in the fund’s results.

A master-feeder structure pools capital from two or more feeder funds into a single master fund that holds the portfolio and executes all trading.

The middle office is the operations function between trading and accounting that captures, enriches, confirms and reconciles trades and manages positions and data.

A mortgage-backed security is a bond backed by a pool of residential or commercial mortgage loans, whose principal and interest payments pass through to investors.

Multiple on invested capital (MOIC) is the total realized and unrealized value of an investment divided by the amount invested.

Net asset value (NAV) is the value of a fund's assets minus its liabilities, usually expressed per share or unit.

Open trade equity is the unrealized profit or loss on open futures and other exchange-traded derivative positions, measured as the difference between trade price and current settlement price.

An option is a derivative giving its buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a set strike price by expiry.

A Panama private investment fund is a lightly regulated fund offered privately to a limited number of investors, commonly structured with a cap of 20 or 50 investors.

A performance fee, or incentive fee, is a fee paid to a fund manager as a share of the fund’s profits, commonly 20%, usually subject to a high-water mark.

Position reconciliation compares the quantities of each security or contract held in a fund’s books with the holdings reported by custodians, prime brokers and counterparties.

A pricing hierarchy is the ordered list of approved price sources a fund uses to value each asset type, applied in sequence when a preferred source is unavailable.

A prime broker is a bank or broker-dealer that provides hedge funds with a bundled package of custody, financing, securities lending, clearing and consolidated reporting.

A PIPE is a private placement in which investors buy newly issued shares or equity-linked securities of a listed company directly from the issuer, usually at a negotiated price.

A private placement memorandum (PPM) is the offering document that describes a private fund’s strategy, terms, risks, fees and service providers to prospective investors.

Reconciliation is the process of comparing records from two or more sources, such as internal books and custodian statements, and investigating and resolving differences.

A repurchase agreement is a sale of securities combined with an agreement to buy them back at a higher price on a later date, functioning economically as a collateralized loan.

A RAIF is a Luxembourg alternative investment fund that is not directly authorized by the CSSF but must be managed by an authorized AIFM, allowing faster launch with AIFMD passporting.

A Schedule K-1 is a US tax form that reports each partner's share of a partnership's income, deductions, gains, losses and credits for the tax year.

A security master is the central reference database of every instrument a fund can hold, storing identifiers, terms and attributes used across trading and accounting systems.

A segregated portfolio company (SPC) is a single legal entity whose assets and liabilities are divided into statutorily separated portfolios.

Segregation of duties splits incompatible tasks — initiating, approving, recording and reconciling a transaction — between different people so no one can both commit and conceal an error or fraud.

A senior bank loan is a floating-rate loan to a company, usually syndicated and secured by a first-priority claim on the borrower’s assets, that ranks ahead of bonds and equity.

Series accounting issues a new series of shares for each subscription period, so each series has its own NAV and high-water mark for performance fee purposes.

A service level agreement defines the services a provider delivers, the deadlines and quality standards for each, how performance is measured and what happens when targets are missed.

A settlement fail occurs when a trade does not settle on its intended settlement date because securities or cash are not delivered as agreed.

Shadow accounting is the practice of maintaining an independent set of fund books, in parallel with the administrator's, to verify NAV, P&L and fees.

A side letter is a separate agreement between a fund and a specific investor that grants rights or terms that differ from the fund’s standard documents.

A side pocket is a separate account or share class within a fund that holds illiquid or hard-to-value assets, segregated from the main liquid portfolio.

An SCSp (société en commandite spéciale) is a Luxembourg limited partnership without legal personality, widely used for private equity, real estate and private credit funds.

A SPAC is a listed shell company that raises cash in an IPO, holds it in trust, and uses it to acquire a private operating company within a set deadline.

A standard operating procedure is a documented, step-by-step instruction for performing a recurring operational task consistently, including owners, inputs, controls and escalation.

Straight-through processing is the automated, end-to-end handling of a transaction from execution to settlement and booking, without manual re-keying or intervention.

A subscription agreement is the contract by which an investor applies to invest in a fund, making representations and agreeing to the fund’s terms.

A swaption is an option giving the holder the right, but not the obligation, to enter an interest rate swap on pre-agreed terms at or before a specified date.

Three-way reconciliation compares the same positions or cash across three sources, typically the manager's books, the administrator's books and the custodian or prime broker.

Total value to paid-in (TVPI) is the ratio of a fund’s cumulative distributions plus remaining NAV to the capital investors have paid in.

Trade allocation is the process of splitting a block trade executed for several funds or accounts into individual account-level fills according to a pre-set, documented methodology.

A trade break is a mismatch between two records of the same trade, such as the manager’s booking and the broker’s confirmation, that must be resolved before settlement.

Trade capture is the process of recording executed trades and all their economic and settlement details into a fund’s systems of record.

Transfer agency is the function that maintains a fund's register of investors and processes subscriptions, redemptions, transfers and related investor communications.

A Treasury bill is a short-term US government debt security with a maturity of one year or less, issued at a discount to face value and repaid at par.

A Treasury bond is a long-term US government debt security, issued with 20- or 30-year maturities, paying a fixed coupon every six months and repaying par at maturity.

A trial balance is a report listing the closing balance of every general ledger account at a point in time, confirming that total debits equal total credits.

UCITS (Undertakings for Collective Investment in Transferable Securities) are EU-regulated open-ended funds that can be sold to retail investors across the EU under a single passport.

A variable capital company is a Singapore corporate fund structure, available since January 2020, that can be a standalone fund or an umbrella with segregated sub-funds.