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Play By The Rules, Whatever They Are; Hedge funds brace for regulation, even if it remains unclear what the overhaul will ultimately look like.(United States. ‌
Play By The Rules, Whatever They Are; Hedge funds brace for regulation, even if it remains unclear what the overhaul will ultimately look like.(United States. Securities and Exchange Commission)(Investment Advisers Act of 1940)
Investment Dealers' Digest June 26, 2009 | Terzo, Gerelyn
Byline: Gerelyn Terzo While much of the nation's capital remains fixated on health care, another potentially sweeping change awaits. Hedge fund managers, who shouldered plenty of blame for the destabilization of the financial markets, have largely averted regulation until now, but those days appear to be numbered. The reaction to the impending regulation from fund managers has been mixed, covering both ends of the spectrum and places in between, from feelings of acceptance to frustration, and touching on uncertainty as details of the overhaul remain sketchy. "The proposal is over 80 pages long, with very few references to hedge funds and hedge fund managers," says Mitch Nichter, a leading partner in the investment management practice at international law firm Paul Hastings. "My issue with this set of proposed regulations is not an issue of being against regulation in the first instance. But my issue is with knee-jerk regulation, and certainly the hedge fund component of this proposal should be placed in this category." The most direct effect the overhaul would have on hedge funds, should it become law, is that it would require hedge fund advisers whose assets under management exceed some modest threshold - widely expected to be about $30 million - to register with the Securities and Exchange Commission as investment advisers under the Investment Advisers Act. Most large hedge fund advisers are already registered with the SEC, but some fear www.highbeam.com/doc/1G1-202382939.html/print
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Play By The Rules, Whatever They Are; Hedge funds brace for regulation, even if it remains unclear what the overhaul will ultimately look like.(United States. ‌
this formality is just the tip of the iceberg. "The real question is, what is it that registered hedge funds are going to have to provide? What kind of information will the government want from them? Here is where the real battle lines start to be drawn," says Ezra Zask, a former hedge fund manager who currently serves as an expert affiliated with Analysis Group. Zask goes on to say that forcing hedge fund registration will serve as a barrier to entry. "Y ou can almost think of registration as a way of limiting competition for hedge funds that already are registered. Registration can be an expensive process. If you have already gone through the expense of registering, it sets a threshold and makes it more difficult for small hedge funds to launch because it adds one more element of expense," he says. According to the proposal, "advisers should be required to report information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability." However, Nichter argues that while hedge funds have been vilified for years for being hotbeds of fraud and more recently for being a significant factor in the destabilization of financial markets, he is not aware of any empirical studies that show fraud in hedge funds is more prevalent than in any other areas. Others express similar frustration. "Hedge funds are not part of the systemic risk that happened. Y ou didn't see one hedge fund get bailed out by the government. Y es, many took investing mandates too far in terms of leverage and liquidity - they got burned and are paying a price for it by going out of business," says Brad Balter, managing partner at hedge fund advisory Balter Capital Management. Hedge fund registration appears to be where the clarity in the proposal as it relates to hedge funds begins and ends, with the exception of the fact that once a hedge fund is registered, it seemingly will open the door for the SEC to request additional disclosures. "Registration is a red herring. It's really what's behind it: leverage, positions and strategies, AUM and investors," says Zask. "Some big hedge funds have been hesitant to disclose leverage even to their own investors. If the government forces them to disclose this, it becomes an issue." The proposal also appears to be gunning for the largest of hedge funds, some of which are beginning to take on the role of investment banker even as Goldman Sachs and Morgan Stanley transform into bank charter companies, where they are forced to be more conservative with capital and face more government oversight. www.highbeam.com/doc/1G1-202382939.html/print
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Play By The Rules, Whatever They Are; Hedge funds brace for regulation, even if it remains unclear what the overhaul will ultimately look like.(United States. ‌
Citadel Investment Group, for example, recently launched an investment banking business and has been feverishly poaching investment banking talent from Merrill Lynch, sources say. If the U.S. government decides to classify large hedge funds as Tier 1 holding companies, this means they will be deemed as holding the potential to destabilize the financial system in some way. "It's hard not to imagine that some of the biggest hedge funds, such as BlackRock, will fall into this category," says Nichter of Paul Hastings. And if hedge funds win this characterization, this is where the SEC's toehold could become a foothold. "The fear is that some of the largest hedge fund managers in the world will be classified as Tier 1 systemic risk players," Zask says. "Then you start to get into some really heavy-duty regulation." Not surprisingly, one common thread throughout the hedge fund industry is the fear that the government will go too far. "We have to be very careful about over-regulation when really it is more a simple function of sticking to the current rules and enforcing them," Balter says. In fact, Nichter has been advising his hedge fund clients to be more proactive in voicing their concerns. "I think that the hedge fund industry is one of the most under-represented industries on the Hill," he says. "If there's one thing I would tell my hedge fund clients it is they should be prepared to lobby Congress." COPYRIGHT 2009 SourceMedia, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights or concerns about this content should be directed to Customer Service. For permission to reuse this article, contact Copyright Clearance Center.
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