Originally posted in the May 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

1. New Regulatory Burdens Placed on Investors
The area of fund compliance has been in flux over the past few months. Spurred in part a number of
factors including the continuing financial crisis and the passage of new laws such as Dodd-Frank, the
US financial regulatory system has seen the enactment of new registration requirements for many
fund managers, including hedge funds and private equity funds. As more and more funds have
added their names to the regulatory registration rolls, so too have funds now been required to
release more information than ever before. Outside of the US, similar demands for increased fund
registration are being echoed in Europe via initiatives such as MiFiD, and in Asia via increased
regulatory oversight in countries such as Singapore.
Fund managers and their lobbying groups originally resisted against such additional registration and
disclosure requirements. The unfortunate result for investors seems to be a regulatory compromise
which relies seems to rely more on the volume of actual disclosures rather than how meaningful they
are. This all show and less substance regulatory format runs the risk of fueling an already vulnerable
investor base which may be increasingly seeking to cut corners on unwisely operational due
diligence. A good example of how this works in practice relates to enhanced ADV disclosures which
US SEC registered fund managers must now make. Specifically, in the US, fund managers registered
with the SEC are now required to disclose several pieces of information which were not previously
mandatory. Currently, for SEC registered funds, many of these disclosures come on Form ADV and
potentially in the future via additional forms such as the new Form PF.
There is really nothing that new about the additional Form ADV disclosures, as they have been in
place for a while. However, as many managers which were previously unregistered now register,
many recent articles in the media have focused on the information revealed in this form about
traditionally very secretive managers. The types of additional information disclosed which were not
necessarily mandated a few years ago includes additional biographical information about the firm
and key personnel as well as details about fund service providers. While the general consensus
among the investment community, at least in a due diligence context, is that additional disclosures
and government oversight is a good thing, the hedge fund industry has seemed to pull the wool over
investor's eyes. The nature and types of disclosures allow hedge funds and private equity managers
to seemingly be more transparent and perhaps indicate a sense of capitulating to investor and
government demands for additional transparency. The problem for investors seeking to perform due
diligence however, is that the transparency levels are set so artificially low as to make these
additional disclosures almost moot in nature.
The bulk of the "additional" Form ADV disclosures provide information which is so basic in nature
that any investor performing operational due diligence on a fund manager would be reckless as to
not request it to begin with. For example, in Part B of Section 7.B.1(1) of Schedule D, the current
Form ADV disclosures require fund managers to provide service provider information concerning five
types of service providers (auditors, prime brokers, custodians, administrators and marketers) which
the SEC views as being important so-called "gatekeepers" for private funds. Generally, the
requirements are that the fund manager provide the "gatekeepers": 1) identity, 2) location and 3)
state whether they are related (i.e. - affiliated) with the fund manager.
© 2011 Corgentum Consulting, LLC

2. An investor performing operational due diligence, who did not inquire as to the identity of a fund's
auditor would not really be conducting much operational due diligence at all. Forcing a manager to
put these disclosures in writing to the SEC is a positive development, but why did the SEC stop so
short, when they had the ability to force managers to make meaningful disclosures. These limited
scope disclosures runs the dangerous risk of allowing certain investors to believe that they either (by
requiring the enhanced Form ADV disclosures the government) will actually be responsible for
policing fund managers better or even worse, that investors can solely rely on the government to
perform due diligence on fund manager’s operational aspects.
With a belief that the more information managers disclose is necessarily better, investors may lose
sight of the importance of what information is actually disclosed. Phrased another way, is it better to
know 100 pieces of information which may hold little value from an operational risk perspective or
five pieces of information of higher value?
With more information comes more responsibility. The onus is on investors, or their advisors, to
ensure that effective operational due diligence is performed on fund managers. Collecting and
reviewing regulatory filings, be it in the US or in other jurisdictions, such as Form ADV (replete with
additional disclosures and all) is certainly something investors should do, but they should be
cautious not to become overly reliant on regulators to put together a complete operational due
diligence review - that is still the job of the investor.
Originally posted in the February 2012 edition of Corgentum Consulting's Operational
Due Diligence Insights.
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About Corgentum Consulting:
Corgentum Consulting is a specialist consulting firm which performs operational due diligence
reviews of fund managers. The firm works with investors including fund of funds, pensions,
endowments, banks ultra-high net-worth individuals, and family offices to conduct the industry's
most comprehensive operational due diligence reviews. Corgentum's work covers all fund
strategies globally including hedge funds, private equity, real estate funds, and traditional funds.
The firm's sole focus on operational due diligence, veteran experience, innovative original
research and fundamental bottom up approach to due diligence allows Corgentum to ensure
that the firm's clients avoid unnecessary operational risks. Corgentum is headquartered at 26
Journal Square, Suite 1005 in Jersey City, New Jersey, 07306. Phone 201-360-2430. For more
information visit, www.Corgentum.com or follow us on Twitter @Corgentum.
© 2011 Corgentum Consulting, LLC