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Hedge funds face challenges to get to grips with Form PF, experts argue at COOConnect debate in New

Date: Tuesday, December 6, 2011
Author: Charles Gubert, COO Connect

Hedge funds have been urged to hurry up and ensure they are fully compliant with all regulation before they file their Form PF, industry experts have said at an event on Dodd Frank registration hosted by COOConnect in New York.

In October, the US Securities and Exchange Commission (SEC) voted to increase the asset threshold for heightened reporting requirements under Form PF from $1 billion to $1.5 billion. The submission deadline for the Form PF was also pushed back from January 2012 until December 2012 although managers with more than $5 billion in assets must hand in their Form PF by June 2012.

Form PF, which falls under Dodd Frank’s remit, is designed to help regulators monitor the systemic risk posed by hedge funds. The heightened reporting requirements force managers to disclose in detail among other things their exposures by asset class, counterparty risk, leverage, geographical concentration, risk profile, liquidity and turnover by asset class. There is a distinct possibility the SEC could request other risk measures such as stress testing and Value at Risk (VaR) data.

“It is important for managers to treat the initial filing of Form PF as a project rather than just another filing. The initial filing is precedent setting with regard to methodology and calculations. The form is over 40 pages with 2,000 plus inputs. There is no one size fits all answer to form PF. Depending upon their service providers and internal and outsourced systems, each manager will be pulling the data from different locations,” said Jeremy Siegel, global head of prime consulting at Credit Suisse.

These reporting requirements will force funds to improve their infrastructure and technology, or at least ensure their fund administrators are ahead of the game. “Hedge fund managers must build the systems to ensure they can handle the reporting requirements,” said Vinod Paul, managing director of service and business development at Eze Castle Integration.

Marshall Saffer, chief operating officer at technology company MIK Solutions, agreed. “There is a lot of infrastructure to put in place. One way of getting to grips with the situation is by using a data warehouse. Hedge funds also need to ensure they have all the correct systems in place and this won’t come cheap,” he added.

While managers may fret about these onerous requirements, one thing is for certain. Institutional investors will not touch any manager they deem to be non-compliant with the rules. Holland West, partner at international law firm Dechert, highlighted that investors require comfort and reassurance. “There is so much competition for investor capital. There is a race to the top among advisers to have strong infrastructures and best practices to show how compliant they are to their investors and develop their trust and confidence,” added West.

Others have pointed out that regulators are under-staffed, under-funded and under-skilled and will be unable to monitor everyone. After all, hedge fund registration and reporting requirements are just a small cog in the massive overhaul of financial regulation. These detractors have also argued that Congressional Republicans are pushing for budget cuts to the SEC and the Commodity Futures Trading Commission (CFTC), which inevitably will make regulators’ jobs even harder. Nevertheless, regulators will have far more information than they did several years ago thanks to the data they will receive from the Form PF. Complacency will therefore not be an excuse.

Some optimists in the audience even believed a change in government could potentially lead to the Dodd Frank Act being repealed and consigned to history although West had reservations. West argued the practicalities of attempting such an enormous legislative undertaking and the political fallout from scrapping Dodd Frank, even for Republicans, would be too great.