The first HFBOA luncheon of 2011 was held in New York City on January 13, 2011. The event was hosted by Evan Margolin of Studley, a tenant only advisory service firm. Evan concentrates in locating office space for hedge fund managers and began the lunch with a few observations.
After two years of contraction, there have been over 700 launches of new hedge funds during the first three quarters of 2010, with several existing firms expanding. Manhattan vacancy rates are decreasing with a commensurate increase in rental rates. Lease rates for mid-town office space are creeping toward $100 per square foot. Of the hedge funds located in New York, approximately 90% are situated in the mid-town area, with the balance located downtown.
Rothstein Kass Update
The main portion of the lunch was a discussion by Joshua Blumenthal and Joseph Markowski of Rothstein Kass ("RK"), focusing on regulatory issues and year-end processes, concentrating on preparations for the annual audit. RK suggested the first step is the development of a timeline with input from all three groups involved in the audit, the client, the administrator and the audit firm. With the timeline, there will be accountability for everyone on their respective deliverables. Also, preferably prior to year-end, the auditor should be alerted of the following:
Fund structure changes
Offering document changes
New side letters
Any new fund offerings
Investment or valuation changes
Any communications from regulatory agencies
Any service provider changes
The above list is not all-inclusive. Further, the financial statement templates should be confirmed as quickly as possible.
The major 2010 change in the financial statement presentation is the FAS 57 (Topic 820) footnote disclosure detailing the asset levels. The footnote will need more detail and explain more clearly what assets comprise each level. The observable inputs used in valuing the assets will need expanded explanation, and transfers between levels will require explanation. Mandatory beginning in 2011, but optional for 2010 audits, a roll-forward schedule of the assets in each level will need inclusion in the financial statements.
As for Fin 48, the major change was positive. Australia recently issued its position, and stated it will not collect tax on investment income sourced in that country, for the years ended 2010 and prior. The ruling removed uncertainty and will allow any fund that previously booked a liability for potential Australian tax to reverse the accrual.
As everyone is aware by now, an investment advisor with $150 million or more under management must register with the SEC by July 21, 2011. Investment advisors with $100 - $150 million under management are not required to register unless the advisor has a managed account. There are further exemptions from registering for advisors managing less than $100 million. RK suggests the investment advisor file its Form ADV with the SEC at least six weeks prior to the July 21 deadline.
Should a SEC registered investment advisor liquidate a fund, the fund is required to have an audit that reflects the fund having zero assets and zero liabilities. This will be convoluted as most funds hold back assets for expenses incurred for winding down the fund. A liquidating trust may be set up to transfer assets used to wind down the fund, but the liquidating trust must then be audited and reflect zero assets and liabilities. A conundrum, with at this point no logical solution.
SAS 70 is being replaced by a new standard, SSAE 16. The new standard requires an assertion by company management that opines on the effectiveness of the company’s internal controls.
Becoming more common when conducting due diligence, foreign investors and large pension plans are requesting SAS 70 reports on a fund manager’s front and middle office operations. Assumptively the back office SAS 70 will be covered by the fund’s administrator. The fund manager may not have the ability or financial wherewithal to provide a front\middle office SAS 70 report, but should be ready to document and explain its control processes in these two areas.
Finally, inflows are beginning to inch into smaller funds after two years of being the exclusive domain of the larger, more recognized funds.
Kurt D. Koeplin, Chief Financial Officer, RAIL-SPLITTER CAPITAL MANAGEMENT, LLC, Member, HFBOA EXECUTIVE BOARD
To register to receive a copy of Rothstein Kassâ€™ Alternative Investment Fund Pro Forma Financial Statements Reference Manuel: http://www.rkco.com/Site/CorpAlternativeInvestmentFundProforma.aspx
2010 Hedge Fund Outlook: Back to the Future:
SAS70 Presentation, see SAS 70 For Hedge Fund- November 2010, webinar slides: