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From the August 13, 2014 Hedge Fund Alert:

A research firm focused on the operations side of the hedge fund business is examining an issue of increasing importance both to regulators and investors: how funds allocate expenses to limited partners. The New York firm, called Convergence, has nearly completed its study and expects to release the results next month. The early take-away: There appears to be little consensus among managers about best practices when it comes to apportioning responsibility for the many expenses associated with running a hedge fund. Rather, Convergence is finding a wide divergence of policies and practices.

“Every fund has documents and investors presumably read them, but they are reading them in a vacuum,” said co-founder John Phinney.

Convergence develops databases covering a range of operational functions to help managers benchmark their practices against industry norms. For its study on expense-allocation policies, the firm is scouring SEC filings and managers’ websites, as well as tapping proprietary sources. The goal is to discern to what extent funds allocate various expenses to limited partners — and, conversely, which expense items are covered by the general partner. While it is standard practice, for example, for investors to pay their share of trading commissions, accounting charges and other expenses directly related to the management of a fund, it’s less clear whether charges for technology, legal advice and staff travel should be borne by the partnership or the management company. The SEC has signaled it intends to focus on expense-allocation policies and practices as part of its “presence exam” program, which it launched in 2012 with the aim of inspecting a broad swath of private-fund operators that were required to register as investment advisors under the Dodd-Frank Act.


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