Disclosing Form PF to investors fraught with challenges, says law firm
Disclosing Form PF to investors could present serious challenges for managers, a US law firm has said.
Form PF disclosure could lead to charges of preferential treatment towards some investors
Institutional investors have made it no secret they want greater transparency from hedge funds. Some have urged managers to provide them with Form PF as part of their operational due diligence processes. However, managers have been warned such disclosure is not wholly straightforward.
“Disclosing Form PF is something managers need to think about very carefully, particularly if they offer it to a select few investors. If a manager gives a select investor the Form PF, which contains material information, it would certainly lead to other investors complaining of preferential treatment. It could also give those select investors a competitive advantage to redeem assets or to spot potential problems at the fund,” said Steven Nadel, partner at Seward & Kissel in New York.
Such preferential treatment could even result in disadvantaged investors seeking legal action against managers, particularly if losses have been incurred, although Nadel said it was premature to speculate about this. However, he recommended managers obtain legal advice before distributing Form PF data to investors. “This is untested water and needs to be handled carefully,” he cautioned.
There was talk earlier in the year about fund administrators creating an investor-friendly Form PF for managers to provide to their clients but this appears to have stalled.
Most experts predict established managers will be reluctant to share the Form PF with investors. “There are a lot of differences of opinion and disclosure of Form PF depends on how much bargaining power the hedge fund and investor have at their disposal. A big ticket allocator may have more sway whereas a smaller manager hoping to raise assets will probably be more accommodating,” said Nadel.
Another risk of Form PF disclosure is information leakage, particularly to the press. “Managers can insert all sorts of clauses demanding confidentiality but reality shows us such information can often end up in the hands of the media, although this is likely to be more of a problem for larger managers,” said Nadel.
Some managers argue against Form PF disclosure highlighting investors could replicate their strategies. This is of particular concern to managers invested in illiquid assets or distressed credit. However, hedge funds focused on listed equities and high-frequency traders are unlikely to be concerned as Form PF data will be at least 60 days old diminishing the risk of copycat trading.
Hedge fund transparency overall has progressed significantly since the crisis and Madoff fraud. A Preqin survey in 2011 said 96% of investors acknowledged improvements in hedge fund transparency compared with just 42% in 2010. Eighty-four percent of managers polled in a recent KPMG and AIMA survey also confirmed they had bolstered their investor transparency since 2008.