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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 duediligence. 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 consensusamong 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 fivetypes 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.

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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 limitedscope 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 managers 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 becautious 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 OperationalDue Diligence Insights.

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About Corgentum Consulting:

Corgentum Consulting is a specialist consulting firm which performs operational due diligencereviews 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'smost comprehensive operational due diligence reviews. Corgentum's work covers all fundstrategies globally including hedge funds, private equity, real estate funds, and traditional funds.The firm's sole focus on operational due diligence, veteran experience, innovative originalresearch and fundamental bottom up approach to due diligence allows Corgentum to ensurethat the firm's clients avoid unnecessary operational risks. Corgentum is headquartered at 26Journal Square, Suite 1005 in Jersey City, New Jersey, 07306. Phone 201-360-2430. For moreinformation visit, www.Corgentum.com or follow us on Twitter @Corgentum.