04.12.2012
By Terry Flanagan

Buy Side Eyes Compliance Hurdles

Hedge funds face daunting data management effort.

New reporting requirements for hedge funds, especially Form PF, will tax the resources of fund managers and service providers alike.

The final rules of Form PF announced by the SEC have opened up a whole new era for hedge fund and private equity businesses, which will now be forced to disclose more information to the U.S. government than previously required.

“Form PF requires hedge funds to consolidate information that’s may be spread across multiple fund administrators, and even then you may only have 60% of the information that’s needed for Form PF,” John Schneider, partner in the investment management regulatory practice at KPMG, told Markets Media. “That’s a significant exercise. Some early adopters have been working on Form PF compliance projects for more than a year.”

Form PF is part of a larger trend in the need to provide daily reporting of OTC derivatives. These include reporting of daily valuations, reporting data to trade repositories, and new margin requirements as a result of the new OTC clearing environment.

Hedge fund managers with more than $150 million in U.S. assets must register with the SEC. Managers with assets between $100 million and 150 million who advise separately-managed accounts must also register.

“The regulatory framework under the Dodd-Frank Act establishes the need to look at data holistically and to aggregate data from multiple sources,” Martin Sreba, principal solutions consultant at Advent Software, told Markets Media. “From a systems standpoint, all in-house apps will be required to report data in an aggregated and normalized fashion.”

Advent Syncova Essentials, a new margin and financing reporting platform powered by the Advent SmartXchange data hub, provides automated reporting of margin, financing and stock loan information across multiple prime broker counterparties.

With automated cross-fund reporting, funds can achieve transparency across all portfolio charges and counterparty agreements.

“Syncova Essentials allows a hedge fund to have a clear and concise view of all margins and exposures’ to counterpointes,” said Sreba. “It runs on SmartXchange, which acts as a conduit between hedge funds and prime brokers.”

Hedge fund managers reported that Dodd-Frank rules driving increased transparency while increasing investor demand for information have been broadly positive for the industry, according to a survey released by accounting firm EisnerAmper.

Half of the respondents were from funds with assets under management (AUM) that exceeded $1 billion. The responding executives were at companies that covered activities including long-short funds, global-macro, fixed income, commodity, arbitrage, event-driven and sector specific strategies.

Due diligence process, risk management procedures and reporting requirements all have increased investor acceptance of hedge funds, allowing them to become increasingly mainstream investment vehicles for institutional and individual investors, the survey results showed

The Dodd-Frank Act also calls for the movement of trading and settlement of many derivative contracts such as swaps, foreign exchange forwards and futures from over-the-counter to clearinghouses. Over 70% of the respondents agreed that this would be beneficial to the financial markets.

While the rules of Form PF require managers to now disclose more information to the Securities and Exchange Commission as outlined in the Dodd-Frank Reform Act, the final rules will also make it easier for them to report earnings than outlined in the original rules.

One of the significant differences that the SEC has made in comparison to Form PF’s original version is the assets under management (AUM) at which private fund advisors must report, which was raised from $1 billion to $1.5 billion.

Advisers will also now have a 60-day reporting deadline as opposed to the 15-day deadline that was initially proposed. In addition, Form PF will also take effect later than originally intended with advisors with over $5 billion AUM, the first to be affected, having to report in the middle of 2012.

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