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Ardmore, PA 19003
Insight: The Value of a Shadow Book
Why have two datasets rather than one? The above is a frequently asked question we receive from clients. But, if the recent market turmoil has highlighted anything, it’s the importance of maintaining a shadow book alongside your administrator’s records. A shadow book has a myriad of benefits. Below, we’ve distilled our top three reasons for you to consider incorporating a shadow book into your investment operations.
Why have two datasets rather than one?
The above is a frequently asked question we receive from clients. But, if the recent market turmoil has highlighted anything, it’s the importance of maintaining a shadow book alongside your administrator’s records. A shadow book has a myriad of benefits.
Below, we’ve distilled our top three reasons for you to consider incorporating a shadow book into your investment operations.
Reason #1: Free your team from administrator limitations that constrain the dataset your investment office uses to analyze the portfolio.
| Examples of Limitations | How a Shadow Book Can Address this Limitation |
|---|---|
| Accounting close occurs prior to receiving all capital statements, leading to performance being reflected in a different period. |
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| Transactions are booked on settlement date (when cash settles) rather than trade date which results in slight differences in asset allocation and performance. |
|
| Valuations are processed monthly before the accounting close, resulting in stale data that the investment team cannot rely on for real-time insights into asset allocation and performance. |
|
Reason #2: Ensure your Accounting Book of Record is complete and accurate
| Process | No Shadow Book | With Shadow Book |
|---|---|---|
| Monthly close | Administrator records are spot checked or verified manually using excel files or visual comparison.
Estimate: 5 minutes per investment line item
Total: 15 hours |
A full reconciliation of administrator records is performed using a shadow book.
Estimate: 5 minutes per non-reconciled investment line item 0 minutes per reconciled investment line item
Total: 2 hours (assuming 20 non-reconciled line items) |
| Daily maintenance | Ad hoc reports are requested and could depend on a specific individual generating the data from internal spreadsheets.
Estimate: May take several hours to fulfill an ad hoc data request
Total: 3 hours |
Daily transactions and valuations are entered into a shadow book – often systematically using a data extraction tool.
Estimate: 2 minutes per capital call / distribution (if using a data extraction tool) 1 minute per capital statement (if using a data extraction tool)
Total: 4 hours (assuming 35 transaction notices) |
| Hours per month | 18 hours | 6 hours |
To ensure the accuracy of every market value and transaction in your administrator’s records, maintaining a shadow book is the most efficient and comprehensive solution. Without a shadow book, you are more likely to rely on spot checking or manually verifying each value – both of which are error-prone and inefficient. Spot checking is also inherently subjective and can lead to a false sense of confidence in the data.
Assuming a portfolio of 200 investment line items, a shadow book can reduce the time spent on the monthly close and ad hoc reporting by 67% (estimated reduction from 18 hours to 6 hours). See below comparison.
Reason #3: Ability to pull forward data at any point in time to better understand how your portfolio is responding to the markets
With a shadow book, you maintain control over your data and can incorporate benchmark proxies, estimates, or other valuation adjustments—beyond what’s provided in capital statements—to assess how current market conditions are affecting asset allocation, exposures, and performance.
Below are examples of scenarios where having control over your data in your Investment Book of Record becomes especially valuable:
- April 3–4, 2025 market downturn
- January and February 2025 decline in semi-conductor stocks after news of Deepseek
- Unwinding the Yen carry trade in 2024
In contrast, relying solely on administrator data without a shadow book can leave you working with information that’s one to two months old, requiring significant effort to bring it current before meaningful portfolio analysis can be performed.
During this market turmoil, control, accuracy, and timeliness are more important than ever – they’re what enable you to be the best stewards of your capital.
As always, we appreciate your ongoing support.
Union Park Consulting