One of the most frequent types of questions posed by hedge fund managers to hedge fund lawyers is: Is this a fund expense or a management company expense? The question arises so often because of the wide variety of expenses incurred in advising hedge funds and operating management entities, as well as the typically broad drafting of expense allocation provisions in fund governing documents. Answers to such questions are important for both practical and legal reasons. Practically, managers do not want to allocate expenses in a way that looks like overreaching, or that departs from market practice. Legally, a mistaken allocation call may constitute a breach of fiduciary duty. The stakes of allocation calls have always been high, but they are higher today than they have been heretofore, for two primary reasons. First, the SEC recently highlighted allocation of expenses as an examination priority. Second, many managers are facing a big, near-term allocation decision – how to allocate expenses in connection with preparing, completing and filing Form PF. The Form PF process involves, among other things: gathering of fund information from disparate sources; computing, compiling and scrubbing of relevant data; interpreting ambiguous directives in the form; and completing and filing the form. It’s a big and potentially expensive process, requiring managers to collect and manage up to 2,000 separate data points. See “Ten Steps to a Successful Form PF
,” Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012). The SEC has not provided guidance on whether Form PF expenses should be borne by the management company or the funds, and market practice and even applicable principles have been difficult to discern. This article seeks to bring coherence to the critical but as yet unanswered question of how to allocate expenses in connection with Form PF. In doing so, this article analyzes: the variety of Form PF expenses that managers can incur; how hedge fund managers generally approach the allocation of expenses between themselves and their funds; how general allocation principles apply specifically to the allocation of Form PF expenses; market practice among hedge fund managers with respect to allocating Form PF expenses; and specific steps managers can take to mitigate the uncertainty concerning Form PF expense allocation determinations.