In Historic Overhaul, SEC Will Demand Hedge Funds Share Extensive Information, Including Strategy And Exposure

While there may not be a hedge fund industry for much longer considering everyone is now positioned dead wrong into this “most hated rally” especially in the post-CPI meltup which sent the VIX

… the SEC will vote to make lives for aspiring billionaires (who demand to be paid 2 and 20 for alpha which is really just levered beta) even more unbearable by proposing a rule that seeks to boost the quality of disclosures it receives from large private and hedge funds, including significantly more information about how funds are set up and their investment strategies.

“Such concentration or exposure may increase the risk of amplified losses for investors and gathering additional data … would help regulators to protect investors and monitor systemic risk,” SEC Chair Gary Gensler said in a statement.

The rule, aimed to boost disclosures around leverage and investment strategies, will be proposed in conjunction with the CFTC, and forms part of ongoing scrutiny of the fund industry.

According to Reuters, the measure would expand reporting requirements for advisors and large hedge funds with a net asset value of at least $500 million, and would require funds and their advisors spell out their investment strategy and exposure, including details around borrowing and financing arrangements with counterparties, open positions and certain large positions, among other details.

As Bloomberg adds, the expansion of confidential filings that big managers must file quarterly with the SEC “would mark one of the biggest increases in regulation for the private-fund industry in a decade.”

The proposal – which the SEC will debate on Wednesday – could be the most controversial yet as it touches on the specific strategies that firms use. While 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 proposal is part of a broader effort by the SEC to boost transparency of the private fund industry amid worries the industry is a growing source of systemic risk, and follows a January draft rule that boosted other Form PF disclosures.

Form PF, which was introduced following the 2007-2009 global financial crisis, is the primary way private funds disclose purchases and sales of securities to the SEC.

Regulators have become concerned over risk in the private industry after hedge fund de-leveraging contributed toward turmoil in the U.S. Treasuries market in March 2020. Hedge funds were again at the center of last year’s GameStop “meme-stock” saga, steamrolled by a bunch of trigger happy retail investors with a short squeezing axe to grind.  Critics argue that while the sector has ballooned following the 2007-2009 financial crisis, regulatory scrutiny of private funds – which are heavy users of leverage – has not kept up.

In the decade since the confidential disclosures were introduced in the wake of the 2008 financial crisis, “the private fund industry has grown in gross asset value by nearly 150% and evolved in terms of its business practices, complexity, and investment strategies,” SEC Chair Gary Gensler said in a statement.

At the same time, industry lobbyists have argued that the data gathered is of limited utility to regulators. What’s more, they say, it can reveal proprietary information behind investment strategies and pose a data security risk. As a result, access to the forms are very limited within the SEC, a restriction the agency didn’t intend to change. Almost as if even the SEC admits it can’t trust its own employees not to leak what should be confidential data.

Once the agency votes to propose the rule on Wednesday, it will take public comment for at least 60 days and consider feedback it receives. The SEC may then revise the proposal before holding a second vote to finalize the regulation several months from now.