Why Hedge Fund Audits are Necessary

Hedge funds are a popular method of investing for those that have a lot of capital to invest, and they’re becoming more and more popular all the time. There are a number of reasons for their popularity, and there are a number of reasons why that popularity and the continued growth of it continue to support the need for hedge fund auditing by professional Certified Public Accountants.

There are about 8350 hedge funds that are currently active and investing.  These 8350 funds have a value of a trillion dollars, give or take.  No, that isn’t a typo or a misprint; these 8350 funds account for a trillion dollars of money being invested in various manners.  8350 associations of people pooling their money together in order to grow that money via investment account for more money than the annual federal budget shortfall for the last few years.  These funds account for more money than all welfare spending (anything that can be defined as ‘welfare’ spending by any reasonable person) in the United States in any given year.  Obviously, there’s a lot of money going around in hedge funds, and they tend to be thought of as the place that people with a lot of money go to invest and grow that money at a rapid pace, hopefully while ensuring that this money is well insulated against the risks that are so commonplace in a marketplace that can fluctuate so rapidly and so wildly.

One of the reasons for this amazing popularity that hedge funds have experienced is that they’re commonly perceived to be a ‘safe’ investment compared to various other methods of investing your money.  Hedge funds, by their very nature, and as indicated by their name, are intended to ‘hedge’ against loss by their very design.  They hedge against losses in various ways and methods, but they’re designed, when properly administered and run, to help the people who have invested in them to avoid losses, even if the market is collapsing around the fund.

Some hedge funds do even better, although there’s more risk involved.  These hedge funds are run in a very aggressive manner, meaning that, if they’re well run and well backed with capital, they can make a lot of purchases of investments that are likely to rebound, allowing the people invested in these particular hedge funds to make extraordinary amounts of money.  The downside is that these hedge funds can also wipe out your money, or large portions of it, almost in a blink of an eye with a misplaced aggressive purchase.

Hedge funds make use of a variety of techniques and practices in order to maintain this level of profitability and stability.  For example, they’ll take part in short selling, the selling of shares that they don’t own, hoping to buy them back at some later date at a lower price once the stock has dropped in value.  There’s also the trading of options or derivatives, which are bundled contracts whose value reflects the fluctuations of the assets that make them up.  And, as many groups, funds, and individuals attempt to, hedge funds will invest in anticipation of things like mergers, hostile take-overs, spin-offs, bankruptcy, or the exiting of bankruptcy proceedings with a plan to reform the company.

Because a hedge fund is so complex, and because so much money can be lost in the blink of an eye, it becomes important that a hedge fund be audited.  Unlike hedge funds, other funds are audited at least once a year, with the findings reported to the Securities Exchange Commission.  On the other hand, hedge funds have to be audited only once a year, and don’t have to report the SEC at all, but need only make a report to the Internal Revenue Service.  This audit will be performed by a Certified Public Accountant, and this accountant will look for a few things. They’ll look to ensure that the fund is conforming to the rules and regulations laid down by the SEC and IRS, as well as to any state or federal regulation which may be applicable.  They’ll also confirm that the hedge fund is performing to the expectations of the people who are investing in it, allowing them to make the decision of whether or not to keep their money in the fund.

Hedge fund auditing will remain important for as long as they exist.  Hedge funds can be great ways to grow your money, but they can also be a great way to lose it in a swift manner, and the auditing performed by a CPA may well be the difference between losing money or being able to make a profit; because of this, auditing will continue to be a necessity.