For Hedge Fund Investors in the Know, New Regulations May Provide Enhanced Transparency

Securities regulations have many goals (prevention of misdeeds, market stability, investor protection), however, for those who can navigate the system, new hedge fund regulations will have the effect of increasing transparency for hedge fund investors. While recent moves appear to be primarily aimed at increasing the ability to the government to collect information on hedge funds in order to prevent market risk, we see hedge fund investors as additional beneficiaries of these government actions.

The SEC website is a wealth of information for hedge fund investors. By navigating through the EDGAR filings section, investors can find information not only on the fund level, but on the adviser level as well. Some of these filings are not new (13f), but some have been enhanced (Form D). Information provided can relate both to adviser positions, as well as organization.

Reviewing the Investment Adviser Public Disclosure area on the SEC website, investors can review an adviser's new Form ADV, both parts I and 2A.  The Form 2A and additional Part I questions are new this year. Contained in these forms is information related to fees, organization, disciplinary history, conflicts of interest, investment strategy, custody and brokerage practices, among other items.

Perhaps the brass ring of information however is the new Form PF, which was just released in final form yesterday. This Form provides the SEC, the CFTC and other interested government agencies with a vast array of portfolio information, focusing on risk. The data collected is meant to stay confidential within the government. However, we believe fund advisers will have to grapple with whether to release this information to investors who request it.

Other sources of transparency for hedge fund investors may stem from various new regulations that are still pending, such as: the proposal that would require many hedge funds to register with the CFTC (in addition to the SEC) and FINRA's proposal requiring broker-dealers that distribute hedge funds to increase "use of proceeds" disclosure to investors. Additionally, even on the accounting side, we see a move by the GIPS oversight body to better address issues around the presentation of hedge fund performance results.

Investors need to stay abreast of these regulatory developments; and hedge fund advisers need to continue towards increased compliance and transparency, which has surely been the theme of this past year in the industry.

Read more articles about the hedge fund industry and related legal issues at Hedge Rows, a blog by Judith Gross

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