Offsetting Form PF costs to fund must lead to full disclosure, says PAAMCO
Managers offsetting Form PF costs to the fund must provide an un-redacted version of the document to investors, PAAMCO, the $8.5 billion emerging manager focused fund of funds has said.
“If a hedge fund manager charges Form PF to the fund, then investors have a right to receive a full copy of the document. This should be pretty obvious. If the manager does not plan to provide Form PF to their investors, then they should pay for it themselves,” said Joshua Barlow, associate director of operational due diligence at PAAMCO, speaking in Irvine, California.
Most managers appear to be paying for Form PF themselves although a sizeable number have reportedly charged Form PF to their investors. 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.
A majority of managers appear content with providing redacted versions of Form PF, or allowing investors to view the document in its entirety during on-site operational due diligence visits. However, most experts predict established managers or those running distressed, illiquid assets will be reluctant to share Form PF with investors. “There are very likely going to be hedge fund managers who will resist sharing this information,” said Barlow.
Most investors have said Form PF disclosure will not be a make or break issue for allocating into a fund, while others have warned the document could prove to be a distraction at the expense of more pressing aspects of operational due diligence.
“As an institutional investor, we have always demanded full position level transparency from our hedge funds, and in 2005 we established a managed accounts platform whereby we got daily position level data for those funds. For us therefore, Form PF is not a big deal because we already have swathes of information on our managers. Nonetheless, if a manager insists we pay for Form PF, we, as investors, ask to see it,” said Barlow.
There are also concerns investors might get confused by Form PF, particularly given that regulatory reporting requirements and criteria are different to what investors are used to. An executive at Bank of America Merrill Lynch warned investors might be puzzled to discover Regulatory Assets under Management (RAuM) cited in Form PF is different to standard AuM, for example.
Perhaps the most pressing issue for all parties is the liability risk. Managers could face accusations of preferential treatment if they provide Form PF to select investors only. “If managers provide more information to certain investors, they could be accused by the SEC of offering preferential treatment to those investors. Managers need to be conscious and thoughtful about how they treat investors, so if they provide Form PF to one investor in a comingled fund, they should provide it to all of their investors,” said Barlow.
Investors are not immune either from the liability risk. If an investor, particularly a fund of funds or pension fund fails to spot a red-flag or fraud in Form PF, they could find themselves being sued by their shareholders. Barlow acknowledged the risk, although added standard operational due diligence procedures are designed to identify potential areas of risk and mitigate the possibility of investing into a fraud or blow-up. “While an investor can never prevent a manager from doing anything illegal, they can carefully review the controls, people and processes to adequately assess the risk of such events,” he said.