Fund of Funds
Audit, tax, and reporting support for funds that invest in other funds, where every number depends on information from underlying managers.
Overview
A fund of funds sits one layer removed from its investments. Its value, its income allocations, and its investor K-1s all depend on capital statements, financial statements, and tax information produced by the underlying funds it holds. That dependency shapes the entire reporting calendar. Pease Bell, a Top 200 U.S. CPA firm headquartered in Cleveland, Ohio, audits fund-of-funds structures and prepares their partnership returns with a clear understanding of how information flows up from underlying managers to the fund and then on to its own investors.
Our work focuses on the areas that matter most in a multi-tier structure: supporting the use of net asset value as a practical expedient for fair value, testing that underlying capital balances are rolled forward to the fund’s year end, tracking K-1s as they arrive, and producing investor reporting that ties to audited figures. With audit, tax, and advisory under one roof, we help the fund keep its audit and tax timelines coordinated.
How We Help Fund of Funds Managers
Fund of Funds Audits
Financial statement audits under U.S. GAAS for fund-of-funds vehicles, including feeder and parallel structures, with procedures focused on the existence and valuation of interests in underlying funds.
NAV Practical Expedient Support
Review of policies for measuring underlying fund interests at net asset value under ASC 820, including roll-forward procedures when underlying statements are dated earlier than the fund’s reporting date.
Underlying Fund Due Diligence
Procedures that help evaluate the reliability of information from underlying managers, such as reviewing their audited financial statements, audit opinions, and valuation policies as part of the fund’s own oversight.
K-1 Collection and Tracking
A tracking process for inbound K-1s from every underlying fund, with estimates where needed, so the fund’s own partnership return and investor K-1s can be prepared as soon as information allows.
Partnership Tax Compliance
Preparation of partnership returns, state filings, and investor K-1s that reflect the character and source of income passed through from many underlying funds, including multistate and foreign reporting items.
Investor Reporting
Capital account statements, performance summaries, and commitment and distribution schedules that reconcile to audited financial statements and help limited partners understand their look-through exposure to underlying managers.
Challenges We Help You Address
- ✓Investor K-1s delayed until every underlying fund reports
- ✓Rolling forward underlying NAVs that are dated before your year end
- ✓Assessing whether underlying fund NAVs are calculated consistently with investment company accounting
- ✓Passing through income character and state sourcing from many funds
- ✓Reconciling capital calls and distributions across dozens of underlying managers
Frequently Asked Questions
What is the NAV practical expedient?
The NAV practical expedient in ASC 820 allows a reporting entity to measure certain investments in other funds at the net asset value per share, or its equivalent, reported by the underlying fund, provided that NAV is calculated consistently with investment company accounting. Investments measured this way are disclosed separately from the fair value hierarchy. Managers still need policies and procedures to support the NAV they use.
Why are fund of funds K-1s often issued late?
A fund of funds cannot finalize its own partnership return until it has tax information from the underlying funds it holds, and those funds may issue their K-1s late in the filing season. The fund of funds then has to aggregate that information before preparing its investors’ K-1s. Many funds plan for extensions and give investors estimates in the meantime.
How is a fund of funds audited?
An audit of a fund of funds focuses heavily on the existence and valuation of its investments in underlying funds. Typical procedures include confirming balances with underlying managers, reviewing their audited financial statements, evaluating the fund’s process for monitoring those managers, and testing roll-forwards when underlying reports are dated before year end. Capital activity and investor allocations are also tested.
What should investor reporting for a fund of funds include?
Investor reporting typically includes each limited partner’s capital account statement, contributions and distributions, remaining unfunded commitments, fees, and performance. Many fund of funds investors also want look-through information on underlying managers and strategies. Reports should reconcile to the audited financial statements so investors receive one consistent set of numbers across the year.
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