Hedge funders managing north of USD5billion in assets face a rapidly encroaching 15 June 2012 deadline to file Form PF.
The filing is to be based on the first quarter of fiscal year 2012, with large private fund advisers managing between USD1.5billion and USD5billion facing a less onerous deadline of 15 December 2012. Those managers running less than USD150million in assets will be required to file annually as opposed to quarterly.
Form PF is a detailed, prescriptive document, which, after all, is meant to help US regulators ascertain whether hedge funds pose systemic risk.
GlobeOp recognised early on that Form PF was going to be an onerous task for mid-size and larger funds and moved quickly to build its own Form PF solution. As June approaches, it has been busy helping clients run test filings to iron out any issues. “Ballpark, we’ve been working with about a dozen of our largest multi-billion dollar clients to prepare for the June filing, along with a smaller number of new clients to whom this is the first service that we’re offering,” confirms GlobeOp COO, Vernon Barback (pictured) from his New York office.
These test filings have helped the firm identify a few important points that managers should be aware of. This is the first time anyone has had to make these filings: identifying potential hotspots beforehand could prove invaluable.
The most important issue, says Barback, is that managers must know their regulated AUM (RAUM). When the SEC first conceived Form PF there was some initial confusion as to what RAUM was. Many believed that it equated to a fund’s NAV but that’s not the case; rather, it is the sum of all assets on the asset side of a fund management company’s balance sheet.
“Some managers have realised that their RAUM is different and bigger than their NAV. Obviously, if that re-calculation were to take a fund from within the USD1.5billion to USD5billion AUM range to the USD5billion plus group, then they would only have about 14 weeks left to file as opposed to having around 40 weeks,” says Barback.
December filers should be mindful of this and check that their RAUM doesn’t, in fact, push them over the USD5billion threshold.
GlobeOp took a pragmatic approach when there was also confusion stemming from substantial room for interpretation in the way a fund manager could complete certain sections of the filing and was one of the first administrators to engage with the SEC. Says Barback: “Some of our suggestions found their way into the FAQ section on the SEC website. Forging that relationship has been helpful especially for someone filing for the first time. If they’ve got questions about what the SEC will find acceptable etc, we can provide an educated view and advise them accordingly.”
The data that June managers need to base their initial filing on relates to their balance sheets at the end of the three calendar months in fiscal year 2012 – April, May and June. Barback confirms that GlobeOp has been actively engaged with managers in preparing test runs prior to the deadline: “As we begin to finalise April month-ends we’re actually working with some of the data that will be used in the final Form PF filing, so it’s pretty exciting,” says Barback.
In many ways Form PF is analogous to filing one’s tax return: it’s mandatory, complex, due on a certain date and you’ve got to get it right, although as Barback wryly observes, at least you aren’t required to write a cheque. The biggest hedge funders have acted quickly to meet the deadline but there are always likely to be one or two that leave it late.
“I would not be surprised if in the next few weeks we get a number of people coming to us for help. We’re well prepared. We have clients doing trial runs with us and we have the capacity to help other managers should they come to us late in the game,” says Barback. To illustrate the data burden managers face, up to 1600 data points may be required across multiple categories depending on fund size and structure.
A second potential hotspot with Form PF relates to counterparty credit exposure. Administrators can only do so much for managers and there will be an inevitable data gap. Managers, then, may need their prime brokers’ input when doing some of the exposure calculations with Barback adding that thought should also be given to precisely what way they choose to perform these calculations, ideally in advance of the first trial run.
Calm before the storm?
Hedge funds with USD5billion plus in assets control a higher percentage of total industry AUM but in terms of actual fund numbers, the guys running USD1.5billion to USD5billion are more prevalent. December may still seem like a long time away, but Barback stresses the point that these mid-size managers need to be thinking about Form PF now, as the filings will be identical and equally complex. This could well put a significant operational burden on administrators as they look to support this second, more substantial wave of filing.
“We feel confident that we can help those people because we would have had the experience with our first clients in June. But I am anticipating that vendors in the space will all feel the pressure because it’s going to be a far bigger group of filings in December and just as complicated,” comments Barback.
Sustainability is another important factor to consider with Form PF. Data needs to be warehoused, methodologies used have to be clearly documented because there’s always a risk that the SEC will come back and question it. Again, like a tax return, the onus is firmly on the manager to submit accurate data which can be tracked and cross-referenced without discrepancies. Given that Form PF will overlap with other regulatory filings, consistency is very much the name of the game.
Perhaps one other unavoidable consequence of Form PF that managers need to consider is the fact that some investors, in their endless pursuit of greater transparency, will want the details of Form PF made available to view.
Says Barback: “Different managers will undoubtedly approach that differently but there will be some managers, I’m sure, who decide to share some of it. As they do their first filing they therefore need to think through carefully – whether it’s now or in December – how the data is going to appear; not only in the eyes of the SEC but potentially other regulators and also, perhaps, to their investors.”
Should December filers start thinking about test filings now? No, says Barback, but what these managers would benefit from initially is discussing the details and implications of Form PF: how will they tackle the data issue surrounding counterparty credit exposure for example. Will they share the report with their investors? “If the answer to sharing is ‘Yes’, are they confident that’s what they really want to considering how the markets may behave in the future?” says Barback. “Once they make that decision they’re locking themselves into a paradigm.
“I think the best advice is: ‘Be prepared’. Even before you do the test filing, you should spend a lot of time thinking about what the report’s going to look like, where it’s going to go and who’s going to see it.”
