It’s summer and there’s no better time than to embrace a new accessory. This time its one that hedge funds are coveting: a “masked fund.”
For Bridgewater Associates it has “ZQPGGAV00000; ” John Paulson has his “Paulson Fund 1” and Cliff Asness’s of AQR Capital Management likes “805-1355888867.”
You’re probably scratching your head and saying, “What?” but let’s explain.
These mysterious numbers allow hedge fund managers to protect their funds from the curious eyes of regulators and interested readers of Securities and Exchange Commission filings, reported Julie Chang of the Wall Street Journal.
With the 2012 rules requiring hedge funds to register with the agency, around 150 private investment advisers are trying to skirt around this by masking the true names of their individual funds.
The SEC allows this thanks to a new instruction enabling firms to keep client anonymity in certain cases. Needless to say, this hasn’t gone over well with investors and advisers. They believe by masking the hedge funds’ identities in these filings, the idea of making hedge funds more transparent is thrown out the window and it affects investors’ ability to watch over the firms that manage their money.
Siddhya Mukerjee of Aksia, a hedge-fund consultant to pensions, endowments and other institutional investors, is one critic and said to the Wall Street Journal, “It’s disappointing. It goes against the idea of investor protection.”
Another issue is the potential complications it brings for the SEC to regulate hedge funds. Robert Plaze, SEC deputy director of the investment management, said if the agency learns a fund may have done some wrongdoing, “it would be more difficult to link up the fund and the adviser” if the fund was hidden in the filings.
The agency has attempted to stay on top of this by creating an ongoing list of firms that have masked their funds’ names. Plaze said the SEC will conduct a follow-up to see if the firms acted within their rights.
So why mask a fund?
Managers may want to to do so if it invests money for a single investor; its name could unveil that client’s identity, said Stuart J. Kaswell, general counsel for the the trade group, Managed Funds Association.
He added that excluding a funds’ real name may also protect investment information that managers want to keep from the marketplace such as a new hedge fund launch with a focus on Asian credit opportunities.
Kaswell said, “Funds may have many legitimate business reasons for keeping the name of the fund confidential.”
The SEC will not identify which hedge fund firms have put on the masks as they’re not required to state if they are not including real names, reported the Wall Street Journal. But with the names including Bridgewater’s “ZQPGGAV00000” and “Paulson Fund 1,” you don’t have to be a detective to figure it out.
Thanks to Dodd-Frank, private investment advisers with $150 million or more in assets under management are required to register with the SEC; this has led to an additional 1,400 firms to share managers, funds, brokers and auditors details.
So why are the names appearing now? Because of the SEC instruction, it enabled firms to “preserve the anonymity” of their private clients through a code or designation rather than a funds’ names in registration filings should they have already done it on the firms’ books and records.
The ability to mask names goes back to a 1961 provision in the Investment Advisers Act of 1940, reported the Wall Street Journal. This allowed private fund advisers keep the identities of individual investors away from the SEC. Fast forward to the 2006 U.S. Court of Appeals decision that saw advisers’ clients as hedge funds as opposed to the funds’ underlying investors; the ability for firms to make funds’ identities was born.
Now the SEC instruction reflect this six-year-old decision.
But whether a firm can mask funds will depend on its record-keeping. With a fund named in the firm’s accounting books, it will not be able to mask the identifies in SEC filings, explained Plaza. If the real names showed up in marketing materials, this would raise SEC concerns.
Plaza added, “If we can walk in there and identify them [from fund records], then you’ve waived your right.” He added that consistent use of codes or must be kept in records and marketing materials so the masking will be allowed in regulatory filings.
Who knew summer reading could be so interesting?