The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Expense Pass-Throughs

  • From Vol. 9 No.38 (Sep. 29, 2016)

    Absent Proper Disclosure, Allocation of Manager Expenses to Funds May Bring Significant SEC Penalties

    The SEC recently settled an enforcement action against a private equity manager, serving as the latest reminder to investment advisers that they must scrupulously adhere to the terms of their disclosures when it comes to allocating fees and expenses to funds, particularly expenses incurred (or discounts obtained) by the adviser itself. In the action, the SEC claimed that the private equity manager, without providing adequate disclosure to fund investors, inappropriately allocated overhead expenses of manager affiliates to two private funds, charged certain funds liability insurance premiums in contravention of the funds’ governing documents and negotiated a legal fee discount for itself while its funds paid the same law firm full price for the same services. Within the settlement order, the SEC also reiterated its view that conflicts of interest that have not been adequately disclosed to or approved by investors (or, where appropriate, their representatives) should be resolved in favor of the investors. See “SEC Enforcement Director Highlights Increased Focus on Undisclosed Private Equity Fees and Expenses” (May 19, 2016). This article summarizes the underlying facts, the SEC’s allegations, the remedial actions undertaken by the manager and the terms of the settlement. For a comprehensive look at private fund fee and expense allocation practices, see our three-part series: “Practices Fund Managers Should Avoid” (Aug. 25, 2016); “Flawed Disclosures to Avoid” (Sep. 8, 2016); and “Preventing and Remedying Improper Allocations” (Sep. 15, 2016).

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  • From Vol. 9 No.34 (Sep. 1, 2016)

    How Managers May Address Increasing Demands of Limited Partners for Standardized Reporting of Fund Fees and Expenses

    In an attempt to regulate the private funds industry, the SEC has set various disclosure requirements for general partners. Unless properly communicated to limited partners through disclosure meeting these requirements, even perfectly legal activities and management fees may result in penalties for general partners. Furthermore, limited partners often seek disclosure exceeding SEC requirements to properly ascertain the actual cost – beyond the stated management fees – of investing in a fund. In addition to requiring more fulsome disclosure, limited partners, whose informational needs can be widely disparate even in the context of a single fund, are increasingly seeking standardization of the format of fee and expense disclosures from general partners. To facilitate this objective, a new template for reporting and disclosing information was recently introduced and has been positively – yet tentatively – received by the industry. These developments were addressed in a recent installment of the monthly webinar series provided by the Investment Management Due Diligence Association. The presenters were David B. Parrish, a partner at Jackson Walker, and Lorelei Graye, a consultant for Conifer Financial Services. This article outlines the key takeaways from the discussion. For more on expense allocations and disclosure, see “Battle-Tested Best Practices for Private Fund Expense Allocations” (Oct. 10, 2014); and our two-part series entitled “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?”: Part One (May 2, 2013); and Part Two (May 9, 2013). 

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  • From Vol. 9 No.33 (Aug. 25, 2016)

    Expense Allocation and Fee Practices Fund Managers Should Avoid to Reduce Risk of SEC Scrutiny (Part One of Three)

    There were no specific regulations – and minimal SEC guidance – for fund managers to reference prior to 2015 when allocating expenses between themselves and their funds. To fill this void and protect investors, the SEC announced in 2015 and 2016 that private fund fee and expense practices would be a priority of its Office of Compliance Inspections and Examinations. A flurry of enforcement actions followed, targeting practices often viewed as “market” by hedge fund managers at the time. Fund managers must study those actions to date to ensure they do not commit the same violations highlighted by the SEC. To illuminate best practices for fund managers to avoid expense allocation violations, The Hedge Fund Law Report spoke with top practitioners in the industry and examined SEC enforcement actions and statements by SEC staff. This article, the first in a three-part series, outlines trends in the types of expense allocations most aggressively scrutinized by the SEC. The second article will examine the flaws in disclosures to investors and the gaps in policies and procedures of managers that frequently result in expense allocation violations. The third article will describe best practices fund managers should adopt to prevent violations, as well as remedial actions to take upon discovering the improper allocation of an expense. For additional coverage of expense allocations, see “Battle-Tested Best Practices for Private Fund Expense Allocations” (Oct. 10, 2014); and our two-part series entitled “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?”: Part One (May 2, 2013); and Part Two (May 9, 2013).

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  • From Vol. 9 No.14 (Apr. 7, 2016)

    Barbash, Breslow and Rozenblit Discuss Hedge Fund Allocations, Restructurings and Advisory Boards

    Liquidity and performance presentation are only two of the myriad issues facing hedge fund managers. See “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016). Hedge fund and private equity managers must also be wary of numerous issues that can trigger conflicts of interest or anti-fraud violations, including expense allocations, restructuring and the use of advisory boards. See “Full Disclosure of Portfolio Company Fee and Payment Arrangements May Reduce Risk of Conflicts and Enforcement Action” (Nov. 12, 2015). During a recent Practising Law Institute program, panelists discussed these and other topics. Barry P. Barbash, a former Director of the SEC Division of Investment Management and now a partner at Willkie Farr & Gallagher, moderated the program, which featured Stephanie R. Breslow, a partner at Schulte Roth & Zabel; and Igor Rozenblit, co-leader of the Private Funds Unit of the SEC Office of Compliance Inspections and Examinations. This article summarizes the panelists’ discussion of these issues. For additional commentary from Breslow, see “Schulte Partner Stephanie Breslow Discusses Tools for Managing Hedge Fund Crises Caused by Liquidity Problems, Poor Performance or Regulatory Issues” (Jan. 9, 2014). For further insight from Rozenblit, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Action (Part Three of Four)” (Jan. 15, 2015).

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  • From Vol. 9 No.13 (Mar. 31, 2016)

    Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers

    Hedge fund managers must guard against insidious issues that can give rise to conflicts of interest or trigger anti-fraud violations, such as liquidity issues caused by a manager’s operation of multiple funds. See “Operational Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part Two of Three)” (May 14, 2015). Similarly, performance representations present potential issues for hedge fund managers, including possible misrepresentations caused by improper valuation practices and fee deferrals. Both the enforcer and industry perspectives of these and other topics were explored at a recent Practising Law Institute program. Barry P. Barbash, a former Director of the SEC Division of Investment Management and now a partner at Willkie Farr & Gallagher, moderated the program, which featured Stephanie R. Breslow, a partner at Schulte Roth & Zabel; and Igor Rozenblit, co-leader of the Private Funds Unit of the SEC Office of Compliance Inspections and Examinations. This article highlights the panelists’ commentary on these matters. For more from Breslow, see our two-part series on “Gates, Side Pockets, Secondaries, Co-Investments, Redemption Suspensions, Funds of One and Fiduciary Duty”: Part One (Dec. 4, 2014); and Part Two (Dec. 11, 2014). For insight from Rozenblit, see “SEC’s Rozenblit Offers Perspectives From the Private Funds Unit” (Feb. 11, 2016); and “Operations and Priorities of the Private Funds Unit” (Sep. 24, 2015).

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  • From Vol. 8 No.19 (May 14, 2015)

    Canadian Report Finds that U.S. Private Equity Investment Costs Are Significantly Underreported

    Alternative asset classes – particularly private equity – are typically more expensive and have more complex cost structures than public asset classes, making cost disclosure and benchmarking difficult.  A recent report by an independent benchmarking and research organization based in Toronto analyzed the reporting and disclosure of private equity funds and determined that less than half of the substantial private equity costs incurred by U.S. pension funds are currently being disclosed.  This article summarizes the key findings in the report.  See also “Four Recommendations to Help Private Equity Fund Managers Reduce the Risk of Conveying Misleading Valuation Information to Prospective and Existing Investors,” The Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013).

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  • From Vol. 8 No.2 (Jan. 15, 2015)

    Ernst & Young’s 2014 Global Hedge Fund and Investor Survey Considers Growth Areas for Hedge Fund Managers, Related Costs and Challenges, Operating Expenses and Cybersecurity

    Ernst & Young (EY) recently released its 2014 Global Hedge Fund and Investor Survey.  The survey covered areas of potential growth for hedge fund managers, challenges and costs associated with growth, expense ratios, investments in operations and cybersecurity concerns.  This article offers a detailed discussion of the survey findings.  For HFLR coverage of last year’s EY survey, see “Ernst & Young’s 2013 Global Hedge Fund and Investor Survey Describes Trends in Asset Sourcing, Alternative Mutual Funds, Customized Solutions, Staffing, Administrator Shadowing, Expense Pass-Throughs and Outsourcing,” The Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013).  For HFLR coverage of EY surveys from prior years, see 2012 survey, 2011 survey, and 2009 survey.

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  • From Vol. 7 No.1 (Jan. 9, 2014)

    Citi Prime Finance Survey Reveals Levels and Mix of Expenses Incurred by Hedge Fund Managers of Different Sizes, Firm Profitability and Margins, Use of Chargebacks and Impact of Regulations on Expenses

    Citi Prime Finance (Citi) recently released its 2013 Business Expense Benchmark Survey (Survey), which provides an overview of hedge fund management company expenses by firm size and region; shows how the components of management company costs change as firms grow; looks at headcount trends and profitability per employee; benchmarks current practices with respect to expense chargebacks to funds; and highlights industry perspectives on the costs and other burdens imposed by new regulations.  This year’s data set draws on, and augments, the data Citi used in preparing its 2012 business expense survey.  See “Citi Prime Finance Report Dissects the Expenses of Running a Hedge Fund Management Business, Identifying Components, Levels, Trends and Benchmarks,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  This article summarizes the key findings from the Survey.

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  • From Vol. 6 No.46 (Dec. 5, 2013)

    Ernst & Young’s 2013 Global Hedge Fund and Investor Survey Describes Trends in Asset Sourcing, Alternative Mutual Funds, Customized Solutions, Staffing, Administrator Shadowing, Expense Pass-Throughs and Outsourcing

    Ernst & Young (EY) recently released the results of its seventh annual Global Hedge Fund and Investor Survey.  The survey revealed the perspectives of hedge fund managers and investors on topics including strategic priorities, operating revenues and costs, investor allocations to hedge funds, new products and services, expense pass-throughs, administrator shadowing, outsourcing and predictions for future hedge fund industry trends.  This article summarizes the key findings of the survey.  For coverage of EY’s 2012 survey, see “Ernst & Young’s Sixth Annual Global Hedge Fund Survey Highlights Continued Divergence of Expectations between Managers and Investors,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).

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  • From Vol. 6 No.40 (Oct. 17, 2013)

    Daniel New, Executive Director of E&Y’s Asset Management Advisory Practice, Discusses Best Practices on “Hot Button” Hedge Fund Compliance Issues: Disclosure, Expense Allocations, Insider Trading, Political Intelligence, CCO Liability, Valuation and More

    The task of serving as chief compliance officer (CCO) of a hedge fund manager is becoming progressively more challenging in light of ever-increasing regulatory obligations, heightened enforcement activity and resource constraints.  CCOs can benefit from understanding the best practices being employed by their peers, and customizing relevant practices to their businesses.  As Executive Director of Ernst & Young’s Asset Management Advisory Practice, Daniel New sees a cross-section of compliance practices at brand-name hedge fund managers.  He sees what works from a compliance perspective, and what needs work.  The Hedge Fund Law Report recently interviewed New on a range of issues regularly encountered by hedge fund manager CCOs.  The interview spanned topics including consistency of fund marketing and disclosure documents; a CCO’s role in preparing and completing Form PF and other regulatory filings; structuring and memorializing annual compliance reviews; allocating expenses between a manager and its funds; insider trading and political intelligence controls; social media use by manager personnel; a CCO’s risk management responsibilities; outsourcing of CCO functions in light of resource constraints; and mitigating rogue trading risks.  The breadth of topics covered reflects the expansiveness of a typical CCO’s portfolio.  The idea behind this interview is to enable CCOs to allocate their scarcest resource – time – more effectively.  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Risk & Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013.  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.31 (Aug. 7, 2013)

    Infovest21 White Paper Provides Industry Perspectives on Hedge Fund Fee Pressures, Expense Allocations and Liquidity Terms 

    Drawing on contributions from hedge fund managers, marketers, consultants, attorneys and others, a white paper recently published by Infovest21 detailed hedge fund industry views on topics including fee pressures, expense allocations, liquidity terms and side letters.  This article summarizes the salient points from the white paper.

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  • From Vol. 6 No.28 (Jul. 18, 2013)

    WilmerHale and Deloitte Identify Best Legal and Accounting Practices for Hedge Fund Valuation, Fees and Expenses

    On June 19, 2013, WilmerHale and Deloitte jointly hosted a webinar entitled “Valuation Issues, SEC Examinations & Enforcement Actions.”  The panel of attorneys and auditors discussed the SEC’s heightened focus on private fund manager practices related to valuation, calculation of fees and allocation of expenses.  Panelists also outlined compliance best practices for hedge fund managers relating to valuation, fees, expenses and other areas on which regulators are focused.  For more on those focus areas, see “OCIE Director Bowden Identifies Five Key Lessons for Hedge Fund Managers from Recent Presence Examinations,” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  This article summarizes salient points from the webinar.

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  • From Vol. 6 No.25 (Jun. 20, 2013)

    How Can Hedge Fund Managers Structure, Negotiate and Implement Expense Caps to Amplify Capital Raising Efforts?  (Part One of Two)

    The evolving view appears to be that an investment in a hedge fund is less like the purchase of a product, and more like the negotiation of a customized contract; and this view applies whether the investment is in a commingled vehicle (with the terms abridged by a side letter) or a bespoke product like a “fund of one.”  Under this “contractual” view of hedge fund investing, one of the more vigorously negotiated points relates to the allocation of organizational, operating and other expenses.  Expenses are a big deal for investors because they are high, going up and can reduce investor returns, often dollar for dollar.  See “Citi Prime Finance Report Dissects the Expenses of Running a Hedge Fund Management Business, Identifying Components, Levels, Trends and Benchmarks,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  The concern is especially pronounced for “anchor” or early investors in a hedge fund, who typically bear a large proportion of expenses until the burden can be spread among later investors.  See “Ernst & Young’s Sixth Annual Global Hedge Fund Survey Highlights Continued Divergence of Expectations between Managers and Investors,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).  From the manager perspective, the analysis is less zero-sum.  Assuming fixed revenue, internalizing fund expenses would reduce the management company’s profit.  But revenue is not fixed, and internalizing the right types and amounts of expenses can increase management company revenue by more than the internalized amount.  This is because internalizing expenses can materially assist in capital raising, which in turn grows assets and increases fee revenue.  In other words, given the intense focus on expenses on the part of many investors, conceding on expenses can sometimes be the “but for” cause of an investment that generates fees well in excess of the relevant expenses.  This is not necessarily rational or logical on the part of investors, but investment decision-making in the hedge fund world (as in other investment settings) is often governed more by investor psychology than detached rationality.  For managers confronting this reality, the question is how much to concede on the expense issue, and how to concede with dignity – that is, how to structure an expense allocation mechanism that is fair, workable and predictable.  Increasingly, managers are answering this question with a simple but effective tool: a contractual cap on organizational and operating expenses to be borne by the investor.  This article is the first in a two-part series weighing the opportunities and drawbacks of expense caps.  Specifically, this article addresses what expense caps are; whether expense caps can be offered only to select investors; expenses typically covered by caps; structuring of expense caps; and the levels at which expense caps are set.  The second installment will address topics including whether expense caps should apply for only a limited period; benefits and drawbacks of offering expense caps; and recommendations for managers in negotiating and implementing expense caps.

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  • From Vol. 6 No.19 (May 9, 2013)

    How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds? (Part Two of Two)

    For hedge fund managers, how to allocate expenses among their management entities and their funds is a high-stakes and challenging topic for at least five reasons.  First, the quantity and variety of expenses involved in operating a hedge fund management business have increased dramatically in recent years, thanks in large part to recent regulation.  Second, there is little regulatory guidance on best practices for expense allocations.  Third, institutional investors are bringing a stricter level of scrutiny to bear on expense allocations.  Fourth, it is difficult to ascertain how other managers are treating similar expenses.  Fifth, as explained more fully below, there are trends afoot in hedge fund disclosure documents that raise the stakes in this area.  In short, allocation of expenses is a classic hard question for hedge fund managers.  This article – the second in a two-part series – tackles some of the thorniest sub-issues head-on.  In particular, this article discusses expense allocation methodologies and practices actually used by hedge fund managers, and the rationales for their use; challenges associated with disclosure of expense allocation practices; approaches for handling allocation of expenses when disclosures are ambiguous or silent with respect to specific expenses; best practices in this area; and the appropriate role of independent boards, advisory committees and service providers in reviewing a manager’s expense allocation policies or decisions.  The first article in this series provided an overview of the key issues and challenges inherent in allocation decisions, and outlined various regulatory and other concerns posed by allocation practices.  See “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013).

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  • From Vol. 6 No.18 (May 2, 2013)

    How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds? (Part One of Two)

    One of the categories of questions most frequently posed by hedge fund managers to outside counsel is: Who should bear the cost of this or that expense – the manager or one or more of its funds?  Generally, the answer is governed by the organizational documents of the manager and its funds, which in turn are drafted in the shadow of legal principles that provide, at best, indirect guidance on allocating expenses.  That is, the SEC and other regulators have not provided specific guidance to hedge fund managers on how to allocate expenses.  This is partly because such guidance would not be practicable – expense types are more various than routine rulemaking can accommodate – and partly so that agencies can reserve enforcement and examination discretion.  At the same time, the stakes of such questions have increased because the costs of operating a hedge fund management business have increased, thanks to Dodd-Frank, the presence examinations initiative and an evolving set of investor expectations more focused on infrastructure, compliance and risk management.  See “Citi Prime Finance Report Dissects the Expenses of Running a Hedge Fund Management Business, Identifying Components, Levels, Trends and Benchmarks,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  In short, hedge fund managers have a growing number and volume of expenses and little in the way of reliable guidance on allocating them.  Hence the frequency of calls to outside counsel on this topic.  In an effort to short-circuit, or at least shorten, some of those calls – to make our in-house counsel subscribers more informed purchasers of legal services; to enable our law firm partner subscribers to deliver lower-margin services more efficiently, the better to focus on higher-margin services; and to refine the due diligence practices of our institutional investor subscribers – The Hedge Fund Law Report is publishing a two-part series on allocation of expenses among hedge fund managers and their funds.  This article, the first in the series, provides an overview of the key issues and challenges inherent in allocation decisions, and outlines various regulatory and other concerns posed by allocation practices.  The second article in the series will provide an overview of approaches used by hedge fund managers in allocating expenses; describe challenges associated with disclosure of expense allocation practices; highlight approaches for addressing the allocation of expenses when disclosures are silent with respect to specific expenses; and discuss key controls designed to ensure that expenses are being allocated in accordance with the manager’s policies and procedures.

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  • From Vol. 6 No.1 (Jan. 3, 2013)

    Citi Prime Finance Report Dissects the Expenses of Running a Hedge Fund Management Business, Identifying Components, Levels, Trends and Benchmarks

    Citi Prime Finance (Citi) recently released its “Citi Prime Finance Hedge Fund Business Expense Survey,” a follow up on and expansion of previous reports on hedge fund industry expenses.  The report provides an independent analysis of the various costs associated with operating a hedge fund management business; identifies trends and patterns within those expenses among different categories of hedge fund managers; and provides benchmarks so that hedge fund managers can ascertain whether their expense levels are above or below the expense levels of similarly situated peers.  This article details key findings outlined in the report.  For a discussion of another useful Citi analysis of trends in the hedge fund industry, see “Citi Prime Finance Survey Predicts Hedge Fund Industry Assets Will Nearly Double by 2016 and Highlights Opportunities for Hedge Fund Managers to Grow Assets Under Management,” The Hedge Fund Law Report, Vol. 5, No. 25 (Jun. 21, 2012).

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  • From Vol. 5 No.25 (Jun. 21, 2012)

    How Should Hedge Fund Managers Allocate Form PF Expenses Between Their Hedge Funds and Their Management Entities?

    One of the most frequent types of questions posed by hedge fund managers to hedge fund lawyers is: Is this a fund expense or a management company expense?  The question arises so often because of the wide variety of expenses incurred in advising hedge funds and operating management entities, as well as the typically broad drafting of expense allocation provisions in fund governing documents.  Answers to such questions are important for both practical and legal reasons.  Practically, managers do not want to allocate expenses in a way that looks like overreaching, or that departs from market practice.  Legally, a mistaken allocation call may constitute a breach of fiduciary duty.  The stakes of allocation calls have always been high, but they are higher today than they have been heretofore, for two primary reasons.  First, the SEC recently highlighted allocation of expenses as an examination priority.  Second, many managers are facing a big, near-term allocation decision – how to allocate expenses in connection with preparing, completing and filing Form PF.  The Form PF process involves, among other things: gathering of fund information from disparate sources; computing, compiling and scrubbing of relevant data; interpreting ambiguous directives in the form; and completing and filing the form.  It’s a big and potentially expensive process, requiring managers to collect and manage up to 2,000 separate data points.  See “Ten Steps to a Successful Form PF,” The Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012).  The SEC has not provided guidance on whether Form PF expenses should be borne by the management company or the funds, and market practice and even applicable principles have been difficult to discern.  This article seeks to bring coherence to the critical but as yet unanswered question of how to allocate expenses in connection with Form PF.  In doing so, this article analyzes: the variety of Form PF expenses that managers can incur; how hedge fund managers generally approach the allocation of expenses between themselves and their funds; how general allocation principles apply specifically to the allocation of Form PF expenses; market practice among hedge fund managers with respect to allocating Form PF expenses; and specific steps managers can take to mitigate the uncertainty concerning Form PF expense allocation determinations.

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  • From Vol. 5 No.1 (Jan. 5, 2012)

    Ernst & Young Survey Juxtaposes the Views of Hedge Fund Managers and Investors on Hedge Fund Succession Planning, Governance, Administration, Expense Pass-Throughs and Due Diligence

    Ernst & Young (E&Y) recently released the 2011 edition of its annual hedge fund survey entitled, “Coming of Age: Global Hedge Fund Survey 2011” (Report).  The Report conveys and compares the views of hedge fund managers and investors on topics including succession, independent board oversight, use of administrators, expense pass-throughs and due diligence.  This article summarizes the more salient findings from the Report.  One of the Report’s many interesting insights is that managers frequently receive little in the way of feedback when a potential investor declines an investment.  The Report partially fills this “feedback gap” by offering generalized insight on what matters most to investors.  For example, managers may be surprised to learn that the absence of a robust and reliable succession plan may have played as much or more of a role in a lost investment as performance or even operational issues.  (The HFLR will be covering succession planning for hedge fund managers in an upcoming issue.)  More generally, the depth of the disparity in perception between managers and investors on a range of topics, as found by the Report, is at times startling.  The Report therefore offers a sobering reality check for both managers and investors.  Both sides need one another, albeit for different reasons, and the lifecycle of an investment can be significantly more productive if expectations and assumptions are better aligned.

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  • From Vol. 2 No.34 (Aug. 27, 2009)

    How Are Hedge Fund Managers Handling Expense Pass-Throughs?

    Investors are aware that investing in a hedge fund comes at a cost and that certain expenses of the fund will be passed through.  However, there is no set rule for what expenses are passed through and some funds have or are developing unique strategies to deal with expenses.  Most hedge funds have implemented arrangements that permit the manager to pass certain expenses through to the fund and to investors, as add-ons to the management fee.  Other funds have included some or all of these costs into the management fee itself.  Still others have or are exploring the use of an expense pass-through in lieu of a fixed management fee.  While the approaches may be different, the goal of most hedge funds is the same: to retain investors and cover expenses.  In good times, investors tend to look less at the actual cost of fees and expenses, and focus more on the returns.  But, after a year and change of generally poor performance, more focus has been placed on expenses and how expenses affect returns.  We detail what expenses are and are not being passed through; soft dollar considerations; treatment and amortization of organizational expenses; tax implications of various approaches to expense pass-throughs; and the negotiability of management fees in the current investment environment.

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