Even after seven quarterly filings of Form PF, many hedge funds, fund administrators and compliance advisors are still uncertain about the approach and methods to accurately calculate the answers to Form PF’s questions. Although the industry has matured significantly and the SEC has provided increased clarification on many of the details, the level of confusion about how to answer many of the questions has not decreased.
Let’s take the question on borrowings as an example; the SEC clearly defines borrowings in their Form PF FAQ as “selling securities short, securities lending transactions, reverse repurchase agreements, transactions in which variation margin is owed [and] synthetic borrowings (e.g. total return swaps that meet the failed sale accounting requirements).” Where do you even begin to find data on whether your total return swaps are failing the sale accounting requirements? It is one thing if you are trading two total return swaps and can use original term sheets to verify if the asset was originally purchased and then subsequently put out on a total return swap; it is something altogether more complex if you are trading thousands of total return swaps.
This leads us to ask the question of whether we are even tracking the right data in the first place. Perhaps the prerequisite to Form PF and its complicated answers should have been a requirement from the SEC that these alternative funds track particular information for a certain period of time so that they have sufficient data for an answer. You cannot identify whether your total return swap should be included as borrowings if you have not captured that specific detail to begin with. It appears that advisors are reacting to regulatory requirements on a need-to-report basis. Thus, they need to know well in advance of any filing deadlines, what data to collect, as it is the data that enables them to provide valuable answers for a good systematic risk analysis.
Due to the evolving nature of these regulatory reports, a system that can calculate the answers and file the reports is not sufficient–what you really need is the ability to track and audit how methodologies and data points have changed over time.