Say I am the fund manager for two accounts, Fund 1 has $1,000,000 AUM and Fund 2 has $10,000,000 AUM. I put in a subscription for an IPO (priced at $10/share) for 5% of fund 1, and 2% of fund 2. The IPO is oversubscribed and I get 15,000 shares (I opted in for 25,000) should these two accounts get allocated the same (as in 1.36% each), or would each get a proportion of their original allocation? I initially wanted to over allocate fund 1, why do I need to allocate pro-rata across 2 different accounts? It almost seems unfair to the account with the initially larger allocation.
Your policies and procedures should cover such cases explicitly . If not , revise them , and do an allocation according to the policy. Then put that into the next report for both funds.
I don;t think there is any rules or regulation that limits you either way, but to prevent misunderstandings and possible inquiry , put it into policies and procedures.
btw , pro-rata could be interpreted various ways. By AUM , but that would be dicey because AUM can fluctuate , by order size , but that seems somewhat arbitrary. Why did you chose 5% and 2% ? Is there some limitation in the IPS or SAI for the funds?
It’s a hypothetical example, so we could say it is due to client imposed limitations. I just needed the initial allocations to be different to show that I originally wanted a higher concentration in one fund verses the other, but due to IPO allocation constraints the final was proportionally equal in both.
Have you (or anyone else) had much exposure to different IPO allocation practices? I would like to find out more on how different firms handle this.
No we don’t participate in IPO’s at my firm . But for some inter-portfolio trades , such issues could arise too and we do cover those in policies and procedures disclosed to shareholders