Gwyn Roberts

10/08/2011 Author: Gwyn Roberts

Hedge funds must see the opportunity in Erisa

With global markets faltering, managers have been skimming 2008 diaries, as they familiarise themselves with the lessons of that watershed year. Most have done a pretty good job of already absorbing the facts – funds are already more transparent, better run and have strived hard to replace more flighty investors with ‘sticky’ institutional cash.

However, as firms have diversified investor bases, the compliance burden has also grown, often in proportion with the perceived longevity of the investor type. Managers currently courting private pension funds should be particularly aware of Employee Retirement Income Security Act (Erisa) rules, triggered when the assets of US benefit plans become 25% of a fund’s total AuM. 
 
In the past this just wasn’t a problem. Funds may have been indirect managers of Erisa cash via fund of hedge funds allocations, but certainly didn’t fall under regulation that demanded SEC registration and a careful consideration of performance fees, side letters and reporting.

Now, with more direct investment the industry has reached tipping point where a significant number of managers – mostly, but not exclusively, US-based – must now undertake the fiduciary responsibilities of Erisa participants.
Pre-2008, this prospect would have terrified many. In 2011 abiding by Erisa should hold no fear, with some managers even seeking the status of Erisa custodians before the 25% is breeched.

What once unnerved managers has become the norm: Dodd-Frank has made SEC registration unavoidable, side letters are already a blunted tool and Erisa has become an attainable set of standards that should be treated as an opportunity, rather than an administrative headache.

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