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Hedge funds face major challenges over Form PF

Date: Thursday, September 1, 2011
Author: Martin Leonard, COO Connect

Hedge funds may face significant operational hurdles in complying with the upcoming Securities and Exchange Commission’s (SEC) Form PF reporting requirements, a leading consultant has warned.

“Funds should not wait on this one as there may be a great deal of work to meet the underlying aggregation and classification requirements of the Form PF,” said Seth Berlin, principal at Performance Thinking & Technologies, a risk management consultancy and a former hedge fund chief operating officer.

Hedge funds are required to clarify and aggregate data including various exposures and liquidity across their parent and master-feeder funds and submit it all to regulators. The SEC could also request other risk measures such as stress testing and Value at Risk (VaR) data. The SEC has said this information is essential if it is to properly monitor systemic risks in the marketplace.

However, many hedge funds do not have the systems or operational infrastructure in place to cope with these new demands. “Larger hedge funds will have data warehousing and infrastructure to cope with these demands. However, the mid-sized funds between $800 million and $1.5 billion may have problems. While these companies will have technical staff, they might not have the infrastructure to handle it. Sorting out the Form PF will not come cheap. There will be data management issues, technology factors and legal issues to be confronted,” said Berlin.

The process has been exacerbated because the regulators have not been wholly clear about when these rules will come into being. “The way the rules are written means that managers do not know precisely when they are coming into place next year. A lot of funds are adopting a ‘wait and see’ approach, which is not ideal because of the operational and technical changes that need to be made if managers are to ensure compliance,” highlighted Berlin.

Several technology providers are in the process of developing solutions to deal with these challenges. Meanwhile, fund administrator GlobeOp recently launched a Form PF service for its clients.

Institutional investors might also demand the Form PF from their hedge funds – something which will not go down well with managers who fear it could compromise their trading information. “Some managers will fear they are giving out proprietary information, which could lead to investors potentially replicating their strategies. But I believe the risk of such mimicking behaviour occurring is low,” added Berlin.

Unlike the Forms ADV I and ADV II, the Form PF will be submitted privately to the SEC. Hedge funds with assets exceeding $1 billion will be required to file their Form PF on a quarterly basis while smaller managers will submit it annually.