What keeps track of a hedge fund's money? Where is money stored if you run a hedge fund?
For example, Bernie Madoff lost $50 billion dollars. However, the real question is, WHO ACTUALLY VERIFIED THERE WAS $50 BILLION DOLLARS IN THE FIRST PLACE? Shouldn't an outside third party (Like a big bank) know exactly how much money there was officially in the fund?
If I started a hedge fund with $10 million dollars, where do I keep the money? In a bank? (The storing method should include at least 2 parties who knows the official dollar amount in the fund; myself and a third party) What is the official method of storing money nowadays with hedge funds?
I mean, i cant just claim that I have $1 Billion dollars under management if I only have $10 million dollars. So what is the official way hedge funds store their operating capital?
Custodian bank and fund admins.
most hedge funds keep the money at a custodian bank, usually their prime broker JP Morgan Goldman Sachs Morgan Stanley UBS, Credit Suisse, etc...there are many.
Many large funds are audited by public accounting firms (there re 4 big ones..EY, PWC, KPMG, Delloite). The accounting firms are now legally liable for accurate audits, so hedge funds use an audit as a stamp of approval that they are legit. Recall that Arthur Anderson was taken down by Enron because a few AA partners shared in the fraud, and that took down an entire 10,000 person firm.
Its possible to create your own bank with 5-10mm i think...so clearly, a fund like Madoff could have created their own bank, in addition to using other public banks like JPM, to make tracking the money more difficult. However, these days, that would be a red flag to any investor.
Any legit fund should be willing to point you to their public auditor, who can verify their AUM claims, because the auditors have access to everything.
If your fund has US client, the management company will need to file Form ADV to SEC. The form will require the information of prime brokers and custodians, fund admin, and auditor. All the information is public. You can find it in IAPD. There is always a possibility of fraud, but at least we know where to start to find out.
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