Offsetting Form PF costs to funds likely to prompt greater investor transparency demands
Managers offsetting Form PF costs to their funds could face greater pressure to supply investors with copies of the document, a leading US law firm has warned.
“Some managers are charging Form PF to their fund. If they do, it will give more gravitas to the argument that investors should receive a copy if they ask for it,” said Steven Nadel, partner at Seward & Kissel in New York.
Institutional investors have made it no secret they want greater transparency from their managers. Some have urged managers to provide them with Form PF as part of their operational due diligence processes. Most experts predict established managers will be reluctant to share Form PF with investors, although some reckon big ticket allocators will have greater success.
Such demands could present legal issues, as warned by Nadel in an earlier interview. He warned managers against giving Form PF to select clients as it could irk other investors, who might cite preferential treatment. Furthermore, it could give those select investors a competitive advantage to redeem assets or spot potential problems. This could even result in legal action against managers, particularly if losses have been incurred.
“If they (managers) do not want to provide the full Form PF, it is advised they give a redacted summary of the key contents of their Form PF. They should certainly not give more data to certain investors. It is prudent they be consistent in what they disclose to all of their clients,” commented Nadel.
Some managers complain their Form PF data could end up in the public domain, while others trading in illiquid assets or distressed credit fret investors could replicate their strategies. Nonetheless, hedge funds focused on listed equities and high-frequency traders are unlikely to be alarmed as Form PF data will be at least 60 days old diminishing the risk of copycat trading.
Managers, however, appear to be divided on charging Form PF to their fund or paying for it out of their own pocket. “More often than not, it is charged to the manager because it is the manager who fills it out and it is the manager who triggers the reporting requirements by having more than $150 million in Regulatory Assets under Management (RAuM),” said Nadel.
“However, some managers are charging it all to the fund, if the fund documents allow it. Other managers are adopting a mixture of two by paying for some of it themselves and offsetting other costs of Form PF to the fund. Managers should consult their offering documentation, if they are unsure of whether they should charge Form PF to the fund or pay for it themselves,” he added. One investor, speaking at an operational due diligence summit today in London, said he would be most displeased if Form PF costs were passed onto the fund.
Hedge funds managing between $150 million and $5 billion must submit Form PF to the SEC early next year. The 50 page document will then be passed onto the Financial Stability Oversight Board, the body tasked with monitoring systemic risk under Dodd-Frank. The August 2012 filing for managers running more than $5 billion went smoothly, according to service providers.