Info Requests, Just What The Auditor Ordered

If you’ve been experiencing in uptick in requests for portfolio information from investors, it’s not because they’re necessarily snooping around a hedge fund’s private business. Rather, it’s an auditor’s way of determining whether fair value to the investment exists, and according to Michael Barkman, a partner in the Global Hedge Fund practice at Ernst & Young, “Such requests may include a confirmation of detailed portfolio information.” Before you can say uh-oh, Barkman says the requests are just “a suggested solution” proffered by the American Institute of Certified Public Accountants. If a HF manager doesn’t provide more than a “confirmation of the aggregate investment in a hedge fund,” there are other means of obtaining that information, such as “observing management site visits or telephone calls to investee funds...reviewing executive partnerships, trust, limited liability corporation or similar agreements...inspecting other documentation supporting the investor’s interest in the fund [or] ...reviewing periodic statements from the fund or trustee reflecting investment activity and comparing activity with amounts records by the investor.” And this is just to determine the investor has the right to an investment. Now, fair value has to be supported, as well. What impact can this have on hedge funds? Says Barkman, “This means that several decisions will need to be made regarding the level of interaction and information that is provided to investors and their auditors...The fiduciary risks of providing information to some vs. all investors must be carefully weighed.”