Hedge Funds To Share More On Their Strategies Under SEC Rule

(Bloomberg) -- US regulators will begin requiring hedge funds to confidentially share more information about their investment strategies.

New rules approved on Thursday will require firms to provide more details to watchdogs, including on investments, borrowing and counter-party exposure. The Securities and Exchange Commission and Commodity Futures Trading Commission described the new regulations, which were proposed in 2022, as a way to better keep tabs on risk in the financial system.  

The expansion of confidential filings that big managers must submit quarterly to the US government is one of the biggest increases in regulation for the private-fund industry in a decade. It also marks the latest move by Wall Street’s main regulators to increase oversight of the sector. 

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Although specific data included on the so-called Form PF isn’t made public, regulators can use it in enforcement actions and to assess broader market risks. The information collected by the regulators will bolster efforts by Financial Stability Oversight Council, according to the SEC. 

SEC Chair Gary Gensler has repeatedly said that regulators need the additional data to keep pace with the growth of the private-funds industry. Funds have grown much larger and their structures more complex since the confidential filings were first required after the financial crisis, according to Gensler.

Regulators “have identified gaps in the information we receive from private fund advisers,” he said in a statement on Thursday. “The adoption also furthers investor protection efforts.”

The Managed Funds Association, which represents hedge funds, called the joint CFTC and SEC rule “misguided” and said it will actually harm regulators’ ability to monitor risks. 

At the same time, “the broad, undisciplined request for data will put sensitive proprietary investment strategies at risk, drive industry consolidation, and increase the cost of investing for the beneficiaries of alternative asset managers, including pensions, foundations, and endowments,” Bryan Corbett, the association’s president and chief executive officer, said in a statement. 

Data Sharing, Crypto

The new rules apply mostly to hedge funds with net asset values of at least $500 million. They will have to share more about operations and strategies and generally report separately on each component of a fund. 

The rule eliminates a requirement for large managers to report aggregated information about the hedge funds they advise, which the SEC said “can obscure the data about hedge funds, including by masking the directional exposures of individual funds.”

In addition, hedge funds must report details on their crypto investment strategies. The regulators took out a definition for digital assets that was included in the proposed rule but kept a requirement for managers to exclude crypto when reporting cash and cash equivalents. The rule also includes more “granular” categories for credit strategies, including litigation finance — investments that involve funding lawsuits. 

The SEC and CFTC, which oversees funds focused on derivatives, also announced an agreement to share information from the forms. 

Consistent with other recent moves to crack down on the private-funds industry, Republicans at both regulators dissented. 

CFTC Commissioner Caroline Pham said in a statement that the joint rule will “create a flood of new information of dubious utility that will generate too much noise” and make it difficult to assess real risk. She and SEC Commissioner Mark Uyeda also bashed the data-sharing arrangement between their two agencies, citing concerns over its scope and a lack of security measures to ensure sensitive information is protected. 

(Updates with comments from hedge-fund trade group in seventh paragraph.)

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