Brief Overview

On 8 February 2024, the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) jointly adopted amendments to Form PF (the Amendments), the confidential reporting form for certain SEC-registered investment advisers to private funds. While the Amendments are intended to provide enhanced regulatory insight into the operations and strategies of hedge funds and their advisers and to improve data quality and comparability,¹ they will also provide these regulators with information that can serve as the basis for examinations, including information regarding advisers’ risk exposure, types of creditors, and fund holding data. 

The Amendments generally increase the amount of disclosure required for all private fund advisers that report on Form PF, although large hedge fund advisers² and advisers with complex fund structures will see the biggest impact. Among other things, the Amendments will impact how large hedge fund advisers report investment exposures, borrowing and counterparty exposure, market factor effects, currency exposure, turnover, country and industry exposure, central clearing counterparty reporting, risk metrics, investment performance by strategy, portfolio liquidity, and financing and investor liquidity. Below, we summarize the key aspects of the Amendments. 

Amendments Applicable to All Private Fund Advisers

Reporting Master-Feeder, Parallel Fund, and Fund-of-Fund Structures

The Amendments require separate reporting for each component fund in a master-feeder arrangement or parallel fund structure, in contrast to the current approach, which permits such reporting either on an aggregate or separate basis. The Amendments have added several questions to Form PF regarding whether the reporting fund is the master fund in a master-feeder arrangement, the reporting fund’s type (i.e., qualifying hedge fund, commodity pool, etc.), whether the reporting fund is a component of a parallel fund structure, and the types of funds that invest in the reporting fund without being feeder funds (i.e., fund-of-funds). Additionally, the Amendments have added specific questions regarding the value of a reporting fund’s investments in equity of third-party private funds, the details of affiliated private funds in which the reporting fund invests, and the identifying details (i.e., the master fund’s legal entity identifies) of master funds for reporting feeder funds. The CFTC and SEC previously have not requested this level of granularity, which the two regulators envision will provide clarity on the composition and risks of each reporting fund. These questions have been added to Form PF in Section 1b.

Withdrawals and Redemptions

Under the current Form PF, only large hedge fund advisers are required to disclose information regarding withdrawal and redemption rights provided in the ordinary course of business. The Amendments have moved the former Question 49(a), discussing withdrawal and redemption rights, to Section 1b, thus requiring input from all private fund advisers. In addition, the Amendments added threshold questions asking whether the reporting fund is a closed- or open-ended private fund and, for quarterly filers, the amount of withdrawals and redemptions for each month of the relevant report period. All private fund advisers now must provide information regarding the frequency of redemption dealing days and data regarding what percentage of a reporting fund’s net asset value may be subject to withdrawal or redemption suspensions, restrictions, or other similar material lockups.

Unfunded Commitments and Contributions

The Amendments have added several new questions requiring information regarding the amount of unfunded commitments and contributions to the reporting fund during the reporting period. These questions regarding unfunded commitments and contributions have been added to Section 1 of Form PF.

Reporting Trading Vehicles

The Amendments added new questions to Form PF requiring the identification of any trading vehicles and whether such trading vehicles hold assets, incur leverage, or conduct trading. The new questions regarding trading vehicles are “yes” or “no” questions and identifying questions, and they do not ask further information about the level of assets traded through the trading vehicles. These trading vehicle questions have been added to Section 1 of Form PF.

Transparency Update

The Amendments also require significant information relating to the portfolio of the reporting funds, fund internal rate of return since inception as of the end of each fiscal quarter, and whether the fund’s internal rate of return includes the effect of any borrowing secured by unfunded commitments, such as lines of credit, value, volatility, negative returns, and drawdowns. These questions regarding fund holdings and performance have been added to Section 1 of Form PF.

Counterparty Exposure

The Amendments also require advisers to answer new questions regarding consolidated counterparty exposure for hedge funds (except for qualifying hedge funds that report on consolidated counterparty exposure in Section 2, as described further below). The Amendments include a requirement for filers to complete a consolidated counterparty exposure table, which shows the reporting fund’s borrowing and collateral received and lending and posted collateral aggregated across all creditors and counterparties. The new categories on the reporting table include unsecured borrowing, secured borrowing and lending (prime brokerage agreement or other brokerage agreement), secured borrowing and lending via repurchase agreement (repo) and reverse repo (including tri-party repo), other secured borrowing and lending, derivative positions cleared by a consolidated counterparty, and derivative positions that are not cleared by a consolidated counterparty. These questions regarding counterparty exposure have been added to Section 1 of Form PF.

Hedge Funds that Use Digital Assets as an Investment Strategy

While the Amendments do not include a definition of “digital assets,” certain questions were updated to provide clarity as to whether or not specific asset classes should be classified as a digital or nondigital strategy. Additionally, the Amendments include digital assets as a reportable investment strategy. The Amendments specify that, when reporting a fund’s investment strategy and exposure, if an asset can be classified as both a nondigital and digital asset, such asset should be reported as a nondigital asset. 

Amendments Impacting Large Hedge Fund Advisers

Monthly Exposure Reporting

Specifically for large hedge fund advisers, the Amendments add increased requirements for such advisers to disclose fund exposure by sub-asset class, monthly long and short value of currency exposure from foreign exchange derivatives and fund assets denominated in other than the base currency (i.e., for US managers, non-US dollar assets), industries as to which the fund has long and short exposure and long and short netted exposure. Under the Amendments, large hedge fund advisers must provide increased transparency on the net long and short value of the reporting fund’s currency exposure arising from foreign exchange derivatives and assets and liabilities denominated in a foreign currency. Additionally, large hedge fund advisers must now note whether such currency or industry exposure is equal to, or exceeds, (i) 5% of the reporting fund’s net asset value, or (ii) US$1 billion of such exposure in US dollars. Regarding long and short netted exposure, large hedge fund advisers must now report the percentage of net asset value represented by the top five and top 10 (in separate questions) long and short netted exposures. The Amendments also removed the aggregate reporting requirement, which required large hedge fund advisers to report certain aggregated information about the hedge funds they advise. According to the SEC and the CFTC, such information regarding aggregated information obscures data, thus masking the directional exposure of individual funds. This requirement has been removed to increase transparency and risk exposure for individual funds. These questions requesting further information on large hedge fund adviser exposure have been added to Section 2 of Form PF.

Counterparty and Creditor Disclosures for Large Hedge Fund Advisers

While the Amendments require all private fund advisers to disclose certain information regarding counterparties and creditors with respect to hedge funds they advise, the Amendments require even more detailed disclosures from large hedge fund advisers. Large hedge fund advisers will complete a more detailed counterparty and creditor exposure table, showing the reporting fund’s borrowing and collateral received and lending and posted collateral aggregated across all creditors and counterparties. Large hedge fund advisers must also disclose unsecured borrowing, secured borrowing and lending (prime brokerage agreement or other brokerage agreement), secured borrowing and lending via repo and reverse repo (including tri-party repo), other secured borrowing and lending, derivative positions cleared by a consolidated counterparty, and derivative positions that are not cleared by a consolidated counterparty. Specifically for large hedge fund advisers, the Amendments require increased detail on the identity of their largest creditors and counterparties and the volume of their counterparty and creditor interactions. These questions regarding large hedge fund adviser counterparties and creditors have been added to Section 2 of Form PF. 

Effective and Compliance Dates

The Amendments are effective one year from the date when the Amendments are posted in the Federal Register. 

Key Takeaways

The Amendments, while providing increased transparency, saddle private fund advisers with burdensome and tedious disclosures of fund holdings, exposure, and counterparty data. While the SEC and CFTC will get a clearer picture of the holdings of private funds, advisers will encounter a heavier burden when filing Form PF and should expect that some of the information reported will inform the focus of SEC examinations, particularly when assessing advisers’ risk exposures and conflicts.