UNDERSTANDING RAUM

HOW TO INTERPRET THE SEC’S METRIC

Understanding RAUM

When did hedge funds begin reporting RAUM ?

On March 31 2012, available public records (Form ADV) began reporting Regulatory
Assets Under Management (RAUM), an SEC metric designed to calculate gross
assets under management for regulatory purposes.

What is the concern?

Because RAUM is different than the traditional Assets Under Management
(AUM), others outside the industry often misinterpret or misunderstand its
meaning.

What is the takeaway?

The SEC created this new metric for regulatory purposes. It should not be confused
with AUM or investor capital at risk. And it is not consistent with U.S. GAAP
accounting standards.

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Understanding RAUM
Form ADV (Part 1A) page 9

Potential for Misunderstanding and Confusion

• RAUM may make funds appear “bigger” than they are
• People unfamiliar with the industry may attempt to make calculations (e.g., on
leverage) that would be inaccurate
• Public confusion with traditionally reported AUM
• Different regulators will be looking at different numbers, furthering confusion

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Understanding RAUM

Executive Summary
• For decades hedge fund managers have supplied investors
and regulators with information measuring Assets Under Contents
Management (AUM) painting a clear picture of net investor Executive Summary 4
capital at risk.
SEC Introduces New Metric 5
• RAUM is a separate measurement developed by the SEC.
It was not intended to replace AUM and does not illustrate AUM: The Traditional Calculation 7
net investor capital at risk. What Makes RAUM Different? 8
• RAUM represents a manager’s gross assets under What RAUM Does Not Consider 9
management, rather than net assets under management.
Additional Items Reported Under
RAUM 10
• The industry has complied with the new SEC reporting
requirements while continuing to providing investors and Questions andAnswers 11
regulators with AUM measurements that truly capture net Resources 17
investor capital at risk.

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Understanding RAUM

SEC Introduces New Metric

• The calculation of “investor capital at risk” has been reported as assets under
management (AUM). The AUMs of hedge funds are reported by a wide range of
recognized industry service providers, such as Hedge Fund Research.
• In 2011, the Securities and Exchange Commission (SEC) changed how hedge fund
managers should report the amount of assets they manage.
• They created an entirely new concept, based on a new gross calculation, called
“regulatory assets under management” (RAUM).
• This new metric was made available through managers’ public filings on Form ADV
beginning in March 2012.

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 Understanding RAUM

Why Did the SEC Introduce RAUM?

• The SEC developed this metric to have a consistent internal measurement

implementing the new mandatory tiered registration of private investment advisers.

• This presentation is designed to explain the difference between the two metrics and
make clear the meaning of each.

*The traditional AUM calculation used by the CFTC is consistent with U.S. GAAP; the RAUM calculation used by the SEC is not. 66
Understanding RAUM

AUM: The Traditional Calculation

• Fund managers calculate their AUM on a net basis. The calculation is made in
accordance
with U.S. GAAP.

• Regulators required hedge fund managers to use this traditional calculation

because it best represents the amount of investor capital at risk.

• AUM represents “investors’ equity” (like shareholders’ equity) and is an accurate

representation of investors’ capital at risk (i.e., the amount of money that investors
actually have invested in a manager’s fund(s)).

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Understanding RAUM

What Makes RAUM Different?

• The RAUM calculation requires managers to report assets managed without deduction
of
any offsetting liabilities.
• RAUM represents all of the assets managed by a single manager, including
assets of separate accounts and separate private funds.
• It is important to remember that hedge funds are legally separate entities, often
have different investors and can engage in distinct trading activities in different
assets and markets.
• Any losses of one fund are borne exclusively by the investors in and counterparties to
that fund, and do not subject other funds managed by the same adviser to losses.
• NOTE: These changes applied to managers’ public filings on Form ADV beginning in
March 2012.

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Understanding RAUM

What RAUM Does Not Consider

• RAUM does not take a fund’s strategy into consideration.

• It may not be an accurate indication of a private fund’s leverage.

• For example, a manager’s RAUM may not take into account certain hedging
techniques
which reduce overall risk to the portfolio.
• The combination of both “long” and “short” positions on the balance sheet of a
hedge fund results in a “gross” exposure figure that exceeds the true “net”
assets under management.

• Positions held that limit exposure to a particular asset may not be represented in such a
manner for purposes of the manager’s RAUM.

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Understanding RAUM

Additional Items Reported Under RAUM

The SEC requires additional items to be reported as part of the RAUM

calculation. A manager’s RAUM may be higher than its AUM because it
includes:

• Hedging Techniques used to Offset Portfolio Risk

• Long and Short Positions (on a gross basis)
• Leverage
• Proprietary assets, assets managed without receiving compensation, or assets of
foreign clients, all of which an adviser may currently exclude from its AUM
• The value of certain private funds that hold significant assets that are not securities
and that can be illiquid and difficult to value
• Uncalled capital commitments (applies mostly to private equity)

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Understanding RAUM

Questions and Answers

What is RAUM?

• In 2011, the SEC created an entirely new regulatory measurement – Regulatory Assets
Under Management (RAUM) – directing how hedge fund managers should report the
amount of assets they manage.

• RAUM was distinct from any existing measurement.

• It did not replace the industry standard AUM measurement, and does not depict the true
net value of investor capital at risk.

• RAUM applied to fund managers’ public filings on Form ADV beginning in 2012

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Understanding RAUM

Questions and Answers

How does the SEC define RAUM?

• The SEC proposes to require all advisers to include in their regulatory assets under
management securities portfolios for which they provide continuous and regular
supervisory or management services, regardless of whether these assets are
proprietary assets, assets managed without receiving compensation, or assets of
foreign clients, all of which an adviser may currently exclude.

• Advisers are not permitted to subtract outstanding indebtedness in determining

regulatory assets under management.

• All advisers are required to use the current market value (or fair value of private fund
assets) rather than their cost in determining regulatory assets under management.

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Understanding RAUM

Questions and Answers

How is RAUM different that the AUM?

• RAUM was an entirely new, separate measure from traditional AUM.

• It did not replace AUM and does not measure net investor capital at risk.

• Instead, RAUM requires managers to report assets managed without deduction of any
offsetting liabilities.

• As a result, RAUM represents a manager’s gross assets under management, rather

than net assets under management.

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Understanding RAUM

Questions and Answers

Is this a more accurate metric for regulators and investors to use when viewing the
industry’s systemic risk and leverage?

• No, it is simply a different metric.

• Keep in mind that a manager’s RAUM may not take into account certain hedging
techniques which reduce overall risk to the portfolio.

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Understanding RAUM
Questions and Answers
If a firm’s gross RAUM number is larger – does that mean they are highly
levered or have risky long / short bets on?
No. RAUM requires managers to include the following additional assets in
their calculation:
• Assets held in family accounts
• Proprietary accounts of the manager
• Accounts for which the manager receives no compensation
• Accounts of non-U.S. persons
• The value of certain private funds that hold significant assets that are not securities
• The amount of any uncalled capital commitments to a private fund

RAUM represents all of the assets managed by a single manager, including assets of
separate accounts and separate private funds.
Hedge funds are legally separate entities, often have different investors and can
engage in distinct trading activities in different assets and markets.
Any losses of one fund are borne exclusively by the investors in and counterparties to
that fund, and do not subject other funds managed by the same adviser to losses.

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Understanding RAUM

Questions and Answers

Are mutual funds subject to this same disclosure?

Yes. All registered investment advisers must file Form ADV.

How often are these numbers updated and required to be filed with the regulators?
Fund managers are required to file Form ADV with the SEC on an annual basis.
Managers are required to calculate current market value of securities investments 90
days prior to the date on which they file Form ADV.

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Understanding RAUM

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