Hedge Fund Street

Will SEC’s Tricks To Catch Tipsters Succeed?

The SEC is trying very hard to tighten the regulations noose. And with good intentions. I mean I do understand the need for freedom in operation style etc… but if all this leads to irregularities and loss of profits for others, then it is definitely not a good idea. Recently US prosecutors and regulators broke up a family-run insider trading ring. This ring managed to make nearly $4m during the past five years. Their modus operandi? Use secret information gleaned at their jobs.

These cases highlight the precarious nature of the business. This family had set up a hedge fund to hide their efforts to trade on information that was not public. The case also brings to fore the problems associated with trying to pin guilt on unscrupulous traders.

As a Financial Times report reveals, it was difficult to initially pin down this family as the trades were placed under a variety of relatives’ names as well as by Aragon, the family hedge fund. So, what solution do regulators have to this problem? They plan to create a database of hedge funds, their investors and sources of private information. Well, this does seem a tall order if you ask me.

Another method adopted by the SEC seems to show more promise. The regulatory authority has asked big brokerage houses on Wall Street to turn over all their e-mail and trading records for the last two weeks of September. This is the month when mutual funds are most active as they are nearing the end of a quarter.

SEC Smells Tip-Off Rat in Hedge Fund Games

The Securities and Exchange Commission recently asked around 10 major Wall Street banks for trading information from the last two weeks of September. The Federal regulators are investigating whether hedge funds are being tipped off about buy and sell orders placed by mutual funds. Hedgeco.net reports:

It's become difficult for hedge fund managers to make money without access to sensitive information, so the SEC examiners will try to determine whether big buy and sell orders placed with the banks by mutual funds in that period triggered any suspicious front-running activity in those same stocks by hedge fund managers or other traders.

Read more: SEC Examines Hedge Fund Tip-Offs

Merely A Millionaire? Not Enough, Says SEC

Since it is stock taking time for almost everybody, I decided we’d follow tradition for once. Let’s have a look at the highs and lows of 2006. What was most characteristic about this year were the innumerable times the regulation word came up for discussion. The entire year was characterized by the undoing, redoing or modifying of regulations.

With hedge funds, you have to maintain a fine balancing between profit and greed. This is a lesson Amaranth managers and investors learned the hard way. Well, I guess I’m done with my stock taking. You cannot indulge too much in the past with something as dynamic as the hedge fund industry.

So what’s new now? Lots! Recently, the Securities and Exchange Commission, under its chairman, Christopher Cox, embraced its investor protection mandate. In simpler terms, the SEC’s just redefined who is rich and thereby severely limited the number of people who can invest in hedge funds. This rule, if passed could be the death knell for small funds who depend on rich people, and even the moderately rich, to get a start.

In simpler times, hedge funds could raise money from 100 accredited investors. The criterion for becoming investor was that you should have a net worth of $1 million (this includes the value of your home) or two consecutive years of income of $200,000 (or $300,000 for a couple’s combined income). The funds could also raise money from any number of qualified buyers who had assets of $5 million to invest.

As critics felt a change was needed to protect investors, the SEC proposed a new rule raising the standard to $2.5 million. The objective is to ensure that people investing in hedge funds had experience in the markets. This new development promises to be quite interesting… So let’s wait and watch what happens now.

Regulators concerned over hedge funds

Okay I agree I’m doing the regulation thing a bit too much. But don’t blame me. If you notice the trend, every few months our regulators seem to wake up to the fact that, horror of horrors, the hedge fund market is still unregulated. So they get into this flurry of activity and announce a few meetings and decisions before they go quiet on us again. I’m just the messenger here.

So what’s up now? Well, we now have information that there’s going to be a US-UK collaboration once again. And this time, they go to war to protect the world from unregulated hedge funds. Regulators plan to meet with Wall Street securities firms to discuss whether too many loans to hedge funds leaves them overexposed to potential meltdowns.

Experts from SEC, Federal Reserve and the U.K.'s Financial Services Authority will meet with firms to discuss margin requirements and how banks can limit their credit risk to hedge funds. See, I’m not trying to be sarcastic here and definitely we do need some kind of meetings to take place before regulations can kick in – if at all they do. What I’m against is their knee-jerk reaction to this entire industry.

Agreed, they’ve been on the boil for some time now and have been threatening us with regulations for some time now. But what I don’t understand is if you do feel such an urgent need, why don’t you do something soon. You end up with endless rounds of talks while there may be another Amaranth brewing around the corner. It doesn’t help to worry once there is a meltdown. What the authorities need to do is act fast. For this they must create a consensus in the hedge fund industry and ensure that the regulations are acceptable to one and all. Then they must implement them at the earliest possible.

Are Our Pension Funds Safe?

I guess we all really need to get a grip on this regulation issue. One time you have just about everyone hankering for regulation, then you have U.S. regulators asserting that there isn't a need for further regulation of hedge funds at this time. And then the SEC gets fidgety and is wondering if it can strengthen the regulation drive and make it more effective.

The SEC now plans to propose rules at a meeting next month raising asset requirements for investing in hedge funds. This can be seen mainly as a reaction to the Amaranth collapse. SEC Chairman Christopher Cox still hasn’t specified how the agency plans to fulfill its pledge. However, he did seem clear about the fact that he wanted the mom-and-pop kind of investors to stay away these ‘highly risky’ forms of investment.

While the Amaranth collapse was big, most hedge fund investors escaped unharmed from this tragedy. But this was just a case of plain luck and lawmakers fear that a hedge fund meltdown could put pension fund investments at risk. Investments in the unregulated hedge fund industry could put the retirement security of American workers in jeopardy. To protect investors, the SEC also plans to propose a new hedge-fund antifraud rule.

However, the SEC’s track record with regulating the hedge fund industry hasn’t been too good. In June, a federal appeals court shot down rules requiring hedge funds to register with the SEC. The agency wanted funds to report their size, number of employees, and types of clients, and submit to random inspections.

Probably, these increased calls for regulation stem from the fear that given the large amount of money in the business – around $1.5 trillion world-wide – there is a very high scope of indiscretion and even unethical business practices.

A Frank Look At The Hedge Fund Industry

Heard of Barney Frank? Chances are, you haven’t. But you will not have to wait for long – Frank is set to become chairman of the powerful House Financial Services Committee, chaired until recently by Michael Oxley, joint author of the Sarbanes-Oxley Act. This new appointment is going to have some effects on the hedge fund industry.

Hedge fund regulation is likely to feature highly on the committee’s agenda if the Democrats take control, though there is no consensus about reforms. According to certain highly placed officials, Frank has expressed concern about the size and influence of hedge funds and their lack of regulation. Focus will be on the scope of the risks that hedge funds present – particularly for public pension plans.

Hedge Fund Gets Political Legitimacy

Back in the good old days when black was black and white was white, hedge funds were the bad guys who had all the fun. They still have fun, but the lines are somewhat blurred now. On the one hand you have the Amaranth collapse and the SEC bid to regulate the industry. The regulation attempt is being portrayed as reining in a wild horse. Well!! Anyways, when you look at the flip side, you have pension funds and even the Nobel institution (the ones that instituted the Nobel Prize) investing in hedge funds. This grants them much needed legitimacy.

With this background in mind, what would you make of a politician who has put more than half of his campaign treasury into a hedge fund? Andrew M. Cuomo, the Democratic candidate for attorney general, is one of the few New York politicians to invest campaign money in anything riskier than a sure bet. And there’s also an interesting aspect to this story. The hedge fund in which Mr. Cuomo invested was directed by one of his largest financial backers, a man who also handled Mr. Cuomo’s personal money. Mr. Cuomo, who had invested $750,000, got a return of nearly 20 percent after one year.

So how are the government and SEC reacting to this new trend of investing campaign money in hedge funds? Well, there is a lot of concern. The main reasons being cited are their unregulated nature and their secrecy. So, a high return could also be a campaign supporter’s efforts to evade contribution limits by padding the return of a favored campaign account.

'Insider Trading' Troubles SEC

Can it get any worse for the hedge fund industry? Just when it was trying to distance itself from the Amaranth collapse and convince investors that hedge funds were a decent lot, news comes in of the enforcement people finding possible evidence of insider trading. Marketwatch.com reports:

SEC enforcement director Linda Thomsen told the Senate Judiciary Committee in written testimony that the agency has brought five insider-trading cases in fiscal 2006 against hedge funds or their advisers. The SEC is currently working on new ways to oversee hedge funds after a court rejected its authority to register fund advisers.

Read more: Hedge fund insider trading 'significant' concern: SEC

SEC At It Again, Tightens Hedge Fund Scrutiny

This was bound to happen. I mean, how could you expect the Securities and Exchange Commission to sit back and watch as hedge funds collapse in on themselves? The SEC is now tightening scrutiny of hedge funds by stepping up examination of the links between hedge funds and broker-dealers, particularly where they are owned by a hedge fund. The SEC has been trying for quite some time now to bring hedge funds under the regulation umbrella and until now, its efforts haven’t been particularly fruitful. In June, a US federal court overturned an SEC rule forcing hedge fund advisers to register with the agency.

The SEC's office of compliance already conducts routine inspection of broker-dealers. The enforcement division, which is focused on alleged wrongdoing in the securities markets, will only step up focus on hedge funds. Msnbc.msn.com reports:

The timing of the fresh scrutiny comes as Amaranth Advisors, a hedge-fund manager that lost about $4.6bn in the past month, has become the second largest hedge fund loss since LTCM.

Read more: SEC tightens hedge fund scrutiny

Phil Goldstein: One Man Army to Tackle SEC

Phil Goldstein is one angry man and not without cause. The activist hedge fund manager whose court challenge forced the Securities and Exchange Commission to abandon its plan to force hedge funds to register, could not get any of the big players from the hedge fund industry to join him in the court action. Moneycentral.msn.com reports:

"Where were all the other guys?" he asks. "Where were all the hedge funds who didn't want registration forced on them? Why didn't they come in with us?"

Read more: Hedge fund manager decries lack of support

Regulation is still the flavor of the season

I know this is getting a bit frayed, but since it is the hot topic of the day, I have no option but to report on the latest happenings on the regulation front. Securities and Exchange Commission chairman Christopher Cox feels that hedge fund regulation is inadequate" and that Congress may need to demand more oversight of the $1.2 trillion industry. Boston.com reports:

Regulators are becoming more concerned about hedge funds because of the power they wield in financial markets and the growing number of frauds. As the industry's assets doubled in the past five years, funds including Bayou Group, Manhattan Investment Fund, Lancer Group, and Philadelphia Alternative Asset Management collapsed, saddling investors with losses.

Read more: SEC chief calls hedge fund rules `inadequate'

Do hedge funds need regulation?

And the debate continues. I have been writing on and off about how the authorities felt the need to regulate hedge funds. You know what, it makes me think? These hedge funds are like the goose that laid golden eggs and the authorities are not the greedy farmer, but just a misguided old man who does not know a golden egg when he sees one.

Last month, the U.S. Court of Appeals struck down a new rule by the Securities and Exchange Commission requiring mandatory registration with the SEC for most hedge funds. Many people believe that registration for hedge funds is a good thing. I mean when an investment pool that contains over $1 trillion in investments, you cannot let it function as it pleases. And that argument is right to some extent. I mean, hedge funds make high-risk bets and sometimes, if they collapse, they can take much of the world markets with them. Courierpostonline.com reports:

This is the third time in less than a year the appeals court has blocked the SEC from acting beyond its authority. According to The Washington Post, "Former SEC member Harvey J. Goldschmid, who voted to approve the plan, yesterday urged regulators to appeal to the U.S. Supreme Court, members of Congress or both. In the Pequot case, a former SEC lawyer who worked on the Pequot investigation before being fired by the agency has written a letter to key members of the Senate banking and finance committees alleging that the SEC dropped the probe because of political pressure."

Read more: Hedge funds must be regulated

Hearing on hedge funds

The U.S. Senate Banking Committee plans to hold a hearing on July 25 to discuss the regulation of hedge funds. This is probably in response to a bill that was introduced in the House of Representatives to revive efforts to tighten government oversight of the hedge fund industry. Reuters.com reports:

A federal appeals court last month threw out an SEC rule adopted in 2004 that required most U.S. hedge fund advisers to register with the investor protection agency and submit to occasional inspections.

Read more: U.S. Senate committee sets hearing on hedge funds

Unregulated Hedge Funds – does the market need a ‘regulator’

The hedge fund industry is well over the $1 trillion mark and growing. The Chicago-based Hedge Fund Research Inc.'s data finds that there are nearly 9,000 hedge funds in the market today. With so much money under circulation, what the industry needs most is some policing. However after the court overturned the U.S. Securities and Exchange Commission’s rule that had taken effect on Feb 1st, the whole market is back to its own ways.

Today hedge funds have become such popular investment tools that everyone from pension funds to 401(k) plans to endowments uses them to potentially boost their returns. So the hedge funds are not just for the rich any more. This puts the investors, who are technically not very risk friendly, to face the kind of risk that they should not be taking.  A Long Term Capital Management and Bayou Group fund collapse today is likely to cause more damage than ever where the retiring population stands to loose a substantial amount of their savings that is their only means to living. Is it therefore wise to let the industry grow un-policed and un-regulated? Read more on this in the article on the need to police hedge funds.

Cayman hedge fund industry: Breaking all records!

The hedge fund industry haven has more than established its credibility time and time again. At the end of 2005, the number of hedge funds registered in the Cayman Islands was 7,106. In the first five months of 2006, the number has moved up by 665. Cayman Islands Monetary Authority (CIMA) stated recently that the phenomenal growth in the number of hedge funds in the Cayman Islands has long surpassed other offshore tax havens like British Virgin Islands and Bermuda.

International investors who want to avoid being taxed in their home country as well as in the country, into which they invest, are understandably quite attracted to Cayman Islands due to the prevailing investor friendly tax laws in place.

The industry’s growth can be attributed to an extensive infrastructure of legal and financial service providers, along with stringent government oversight. It may be noted that quite a few U.S. pension funds have been seen investing in U.S. hedge fund managers through their offshore shell structures to legally avoid U.S. taxes. This has added volumes to the industry that is over $1.3 trillion in size.

Hedge fund managers unhappy with governance

U.S. securities regulations restrict hedge fund managers from publicly discussing their fund performance, fund-raising or other matters that may be interpreted as advertising to the general public. These hassles, they believe, restrain their ability to respond to articles that may be inaccurate. Washingtonpost.com reports:

A media focus on a handful of frauds such as that involving Bayou Management, a collapsed Connecticut hedge fund, along with reports of hedge fund managers' lavish lifestyles, has given the industry a negative image that isn't being offset by positive comment, industry officials said.

Read more: Hedge fund executives want publicity rules changed

Europe puts hedge funds under scanner

Hedge funds’ popularity seems to have become their undoing. This popularity and high profile is prompting European governments to examine ways to curtail their rising power and to consider new rules for fund investors. The governments' efforts are being championed by influential European corporate executives. These executives are unhappy about the way hedge funds can use relatively small stakes in publicly listed companies to agitate for change.

Historically, hedge funds have been lightly regulated because they were funds for extremely wealthy, sophisticated investors. But now, as there is more money in the business, the pressure to increase oversight has increased. This pressure is visible in both Europe and in the U.S. Post-gazette.com reports:

Earlier this month, U.S. regulators said there isn't a need for further regulation of hedge funds at this time. Regulators from the Federal Reserve, Treasury Department, SEC, and Commodity Futures Trading Commission testified before a Senate subcommittee that they needed to better understand hedge funds before prescribing additional regulations, with some officials cautioning that the current way of regulating funds -- indirectly by focusing on counterparty risk -- is effective.

Read more: Hedge funds get Europe's scrutiny

No regulation for hedge funds

Hedge funds have suddenly become the rage all over. What was considered a risky adventure fit for those moneyed few, has suddenly become one of the best methods of making money. And this has led to an explosive growth of this once reviled method of investment. Today the mounting integration of hedge funds into the world financial system has made most industry experts and even central bank policy-makers wary. They believe that hedge funds have increased the risks in the industry and need to be minutely scrutinized.

Sounds more like a doomsday warning. While on the one hand, this industry has got a lot of credibility thanks to institutional investors investing their funds into the hedge fund market, there are others who believe that the growth of hedge funds could have serious implications. However, Federal Reserve Chairman Ben S. Bernanke, like his predecessor, does not think regulating hedge funds is a good idea. Rockymountainnews.com reports:

Bernanke on Tuesday told a hedge-fund conference hosted by the Atlanta Fed that he's skeptical about proposals such as a database of fund holdings that would let authorities monitor risk in the broader financial system. Instead, firms that deal with hedge funds are best equipped to do the job because they have the "best incentives".

Read more: Fed chief wary of regulating hedge funds

Hedge funds beware: Big bro’s watching

Here is the latest update on the regulations imposed on hedge funds by the Securities and Exchange Commission (SEC). I recently wrote about how the SEC was getting serious with hedge funds. In February, the Commission asked most hedge funds to register as investment advisors. Now as a follow-up, the SEC is targeting funds that have weak internal controls for regulatory action.

As part of its new compliance regulations, the agency plans to conduct audits at least every three years. This will be especially for funds that meet their ‘high-risk’ criteria. In my opinion, while some amount of regulation is good, at the end of the day, market forces will make these funds become self regulatory. Of course, a little nudge from the authorities never did any harm. Latimes.com reports:

Factors related to a fund's "internal control environment" are at the center of what constitutes high risk, said Elizabeth Jacobs, deputy director of the SEC's Office of International Affairs.

Read more: Regulators to Scrutinize 'High-Risk' Funds

Hedge funds come under federal supervision

As per the new rules from the Securities and Exchange Commission, any hedge fund which has more than $30 million in assets, 15 or more investors and a lock-up period of less than two years will have to register as investment advisors under the Investment Advisors Act of 1940. Thanks to this mandate, there are quite a few new requirements that must be addressed immediately. Some of them include appointing a chief compliance officer, improving record-keeping practices and submitting to periodic audits from the SEC.

But there are some things no hedge fund will compromise on. Secrecy of investments is still of prime importance to the industry. So, though hedge funds must register with the SEC, they do not have to disclose their investments or investment methods, unlike mutual funds managers. And the hedge fund industry is not going to let go of this privilege. They are committed to fighting further regulation because according to them, maintaining the secrecy of investments and strategies allows it to exploit market anomalies. Looks like this is one area the SEC cannot breach.

Hedge funds try to limit risks

Yesterday, I wrote a short piece about how hedge fund managers seem to be reluctant to make risky investments. Doesn’t this sound a bit odd? I mean hedge funds are supposed to make money the risky way so how do these managers hope to make big money without taking adequate risks. Their argument is that their customers don’t want them to deal in such investments. So, for fear of losing these customers and more importantly, their fees, which can only be called exorbitant, hedge fund firms are now learning to play safe.

This sudden change in what is essentially a risk-taking business came about slowly. As fund managers realized that they were making a killing by raising money from pension funds, endowments, insurance companies and other institutional investors, their taste for the dangerous diminished. And the clincher was the 2 percent per annum management fees from large amounts of assets. With all these benefits, it didn’t take long for caution to become the new byword for hedge fund managers.

The sector's profile witnessed a change after institutions poured money in and drove worldwide hedge fund assets to more than $1,000bn. This large amount of money has weighed heavily on hedge fund performance and has led to ‘overcrowding’ in many strategies. Then there were institutional investors like pension funds which have asked the hedge funds in which they invest, to reduce their risk levels.

However, any which way you look at it, hedge fund firms seem to be the gainers. As they reach critical mass, these firms begin to slowdown their aggressive activity and try to appease their major clients. This strategy of caution allows other investors to repose more faith into these firms, which then translates to more business and more money.

‘Hedge funds are dangerous investments’

Hedge funds have suddenly become the rage all over. What was considered a risky adventure fit for those moneyed few has suddenly become one of the best methods of making money. And this has led to an explosive growth of this once reviled method of investment. Today the mounting integration of hedge funds into the world financial system has made most industry experts and even central bank policy-makers wary. They believe that hedge funds have increased the risks in the industry and need to be minutely scrutinized.

Sounds more like a doomsday warning. While on the one hand, the Nobel Foundation granted this industry a lot of credibility by investing some of its funds into the hedge fund market, there are others who believe that the growth of hedge funds could have serious implications. At a recent conference hosted by the Federal Reserve Bank of Atlanta on systemic risk, senior policy-makers believed that the unregulated activities of hedge funds could lead to serious problems. What is it that is worrying these financial gurus?

Most policy makers believe that these unregulated funds could, at some point in the future, cause a crisis, which could spill over into the real economy and damage its goals of low inflation and sustainable growth. According to them, the problem with hedge funds is that they use strategies, such as short selling and derivatives trading. This differs vastly from the strategies used by traditional equity and bond funds. To be honest, I don’t see a problem with being different.

Another problem according to experts is the increasing involvement of pension funds in this industry. According to statistics, the volume of investment made in hedge funds by pension funds has more than tripled. Pension funds have traditionally relied on much safer, and lower yielding, investments. All this noise about their lack of reliability has made the U.S. Treasury watch the hedge fund industry closely. And one of the outcomes of this close watch is that now, many hedge funds are required to register with the Securities and Exchange Commission.

To register or not to register! – The battle between SEC and Hedge Funds continues

When SEC passed it’s ‘need to register’ mandate, little did it know what was in the offing. While there were some who had voluntarily registered even before the ruling was passed, there are others who have not done so even after the deadline has passed. There are some who are contesting the rule in the court of law. Then there are those who have conveniently bypassed not coming into the loop by following one or the other exclusion criteria.

Since the government amended its Investment Advisors Act of 1940, some 962 hedge fund managers have registered. Registration implies that not only do the funds have to disclose their current trading status to the government now; they have to continue to do this month after month. Not only does it cost a lot of money and time, the law is expected to cause a lot of continued inconvenience to the hedge funds who are used to working in complete secrecy. Some rough estimates of money involved are in the range of $45,000 to $300,000.

Some hedge funds like New York based hedge fund Bulldog Investors have taken SEC to court for its act. There are some who feel that there is quite a good chance that the SEC may have to take back its rule. Therefore there exists at this point of time, a lot of confusion regarding who is registering and who is not. Those who are against the rule argue that the SEC lacks both the expertise as well as the infrastructure to play the role of a superintendent of the industry. Hedge funds are very specialized in their functioning and use diversified strategies. These may more often than not be difficult to comprehend by the inspectors at SEC. This may lead to a lot of misunderstanding and unnecessary harassment of the funds.

There are some hedge funds that have put their house in order in accordance with the norms laid down by SEC. They have however refrained from actually registering with the authority. Take the case of Boston based Weiss Asset Management. The fund has managed to convince its clients to keep their money locked in for a period of 25 months. This makes it eligible to not necessarily register with the commission. There are other parameters that enable the hedge fund to escape registration. Some of these are maintaining a client base of less than 15 investors and managing less than $30 million. They can also be excluded if they refrain from raising new funds.

SEC on the other hand argues that the process of registration is very important. SEC maintains that by ensuring that the fund managers register with it and comply with the directives, it will be able to cut down the instances of fraud. The commission representative said that the industry is full of fraudulent hedge finds. At one point at least 400 funds were being investigated by the law for possible frauds.

By insisting that the funds comply with the directives, the commission hopes to bring this number considerably down. However, many opposed to the rule argue that this action is highly unlikely to bring out instance of a pending fraud. The inspectors are unlikely to find the hints of a fraud in the making because of the complex nature of the funds. All the paper work may be flawless there by showing that the fund is prim and proper in its functioning. The investors may also have a false sense of security just because the fund is registered with SEC. This may lead to more harm than good. MSN reports:

“To emphasize the effect hedge funds can have on the market, McFarland described one unnamed fund responsible for, on average, around 5 percent of the daily trading on the New York Stock Exchange”

Investors confused about hedge fund figures

Just when everyone thought that the hedge fund industry is becoming a little less secretive it seems to have gotten more complicated. The lightly regulated industry has for long been in the eye of storm raisers regarding their behind the curtain activities. Even when the industry has bloated to over $1.1 trillion, the figures that the industry trackers continue to push into the market cause more confusion.

This was evident when two of the industry trackers revealed the net assets that were pulled out of the market. Tremont Capital Management Inc. recently announced that the investors have removed $4.3 billion from hedge funds in the last quarter of 2005. Tremont Capital tracks around 3,200 hedge funds. On the other hand Hedge Fund Research Inc. said that the number was around $824 million. Hedge Fund Research tracks 6,700 hedge funds. The two figures are separated by billions of dollars. Therefore, in a nut-shell since no central database exists, the accuracy of the data collected, analyzed and interpreted can be questionable.

SEC has mandated that hedge funds register with it so as to allow it to have a better idea about the functioning and performance of the funds. However most of the funds are still outside its jurisdiction. Those who are registered also are not bound by any rule to share authentic data with one centralized agency. This obviously leads to a situation wherein the fund is free to reveal whet ever info it wants to divulge to whom-so-ever it wishes to. This then leads to discrepancy in figures such as that being witnessed here. Compare this situation with mutual funds wherein the $8.8 trillion industry's trade group is able to supply fairly accurate data every month. Reuters reports:

“This sort of discrepancy, which analysts say occurs often, may be confusing investors even more in a lightly regulated industry where assets have doubled in the last 5 years but which has also been called secretive by analysts and clients.”

Hedge Funds hedge new rules as regulation tightens

With an explosive growth in Hedge Funds, the Federal regulators want them to be registered with the Securities and Exchange Commission from 8 February, 2006. The new rule makes it mandatory for Hedge funds with more than 14 clients and $30 million in assets to register themselves. However, Hedge funds are finding loopholes in the law to escape registration.

Fearing tight scrutiny of their activities, hedge funds are locking up their money for two or more years and are not inviting any new clients. But locking up investments has affected liquidity and that makes it unattractive to a certain segment of investors. Hedge Funds are avoiding registration in order to save on costs.

Registered firms are required to keep accurate and complete records of all transactions and communications which makes operations expensive and cumbersome. Certain experts believe that the new rule will divide the hedge fund industry into two, with smaller players that service wealthy customers not registering themselves by using exemptions while the larger ones that cater to institutions opting for registration. Times Leader reports:

In July 2004, there were anywhere from 2,300 to 3,500 fund advisers counseling about 7,000 funds with assets of nearly $800 billion, according to SEC documents. About 60 percent of those advisers, or nearly 1,400 to 2,100, had at least $25 million in assets, making them eligible to register with the SEC instead of with a state regulator.

Legislation in Cayman Islands headed for amendments

The Cayman Islands are said to be home to 80% of the total offshore hedge funds that exist. It recently strengthened this unique position by registering the 10,000th fund in its domicile. The Cayman Islands Monetary Authority (CIMA) is set to introduce several changes in its legislation in order to make the rules more in line with the recommendations of the International Monetary Fund.

The changes are being considered after it was examined by a working group of government officers and private sector representatives.The amendments include both minor and major changes like a change in the classification of the fund names to increasing the minimum initial investment amount.

Another important change expected is the removal of the dual regulation that required Funds domiciled abroad to be registered with CIMA for them to fall under the administration of Cayman and similar registration for Cayman-domiciled funds for them to be serviced by other administrators. The changes are expected to provide greater scope of growth for the Cayman hedge fund administrators. Hedgeweek reports:

Cayman has long pioneered cutting-edge regulatory and legislative transitions that have enabled the jurisdiction to flourish, including the flexible effective Mutual Funds Law. A re-examination of the legislation by a working group has recommended various amendments that industry members anticipate will be enacted in 2006.

EU market regulators disallow Hedge Fund indices

The Committee of European Securities Regulators (CESR) does not approve of the European Union funds using Hedge fund indices for making investments. UCITS is a 25 member European Union Fund that makes cross border investments.

The Industry had made a request to the regulator to allow them to invest in Hedge fund indices in order to achieve greater returns and make up for deficits faced by their pension funds. However the regulators consider the hedge fund indices to be too complex and under regulated to allow UCTIS to to trade in them. More over such funds are generally registered in offshore countries that do not have the right amount of regulation or controls necessary for such high risk assets. The Committee was however willing to review its decision in October 2006.

CESR's recommendation will be finalized only after they have been approved by the European Commission. The decision could make a big difference to the 4 trillion euros of investments that UCTIS holds for its members. borsaitaliana reuters reports:

"Given the complexities of hedge fund indices and the fact that they are still developing, CESR cannot recommend, at this stage allowing hedge funds indices to be considered as financial indices for the eligibility of UCTIS,"CER said in a statement. Such funds are seen as risky because many are registered in lightly-regulated, low-tax offshore centers such as the Cayman Islands.

US Hedge fund industry just hours away from being regulated

October 2004 was a turning point for the hedge fund industry in the US. Securities and Exchange Commission (SEC) which is an apex regulatory authority in the US decided to bring some order into the functioning of the most unregulated financial instrument. Today the hedge fund industry is worth over $1.3 trillion with more than 8000 players. Out of the, nearly 7000 hedge funds originate or offer their services in the US alone. They contribute nearly $750 billion to the kitty.

With so much at stake, it is but obvious for regulators to attempt to bring about some sense of discipline in to the market. Hedge funds trades amount to almost 20% of all US stock trading. Should something go grossly wrong with the players, the nations complete economy is at stake. 

However not everyone is ready to accept the new regulation. Most of the hedge funds are attempting to find loopholes in the system so as to escape being registered with the commission. While there are others who are downright fighting it in the court of law. One such case pending hearing has been filed by hedge fund adviser Phillip Goldstein and fund partnership Opportunity Partners. This is so since the SEC is now mandating that all the hedge funds that have a lock in period of less than 2 years have to register with them.

Registering implies that they have to not only open their books to scrutiny but also make frequent disclosures. This obviously takes a lot of time and effort, which is something that the hedge funds are not ready to do. Apart from this, it also means that the hedge funds will have to be very careful in executing trades. Hedge funds have for long been associated with impromptu and often rash trades. This can cause the investors to loose a lot of money merely because of the whim of the fund manager.

The loss of money becomes more relevant in the scenario wherein retail investors and sensitive institutional investors are joining the fray in an unprecedented way. The overall lowering of the basic requirement of seed money is one of the key contributors. Therefore institutional investors such as those relating to pension funds, retirement plans and university endowments have been increasingly pouring billions into hedge funds, lured by the prospect of high returns even in a down market.

SEC had adopted the rule in October 2004 and even at that time; the 5 key members of the commission were divided in their opinion on regulation. Therefore when Christopher Cox assumed the position of SEC Chairman the industry hoped for overturn or revision of the controversial rule. But nothing like this happened and now we are less than 48 hours away from the implementation of the rule. The Chron reports:

"Hedge funds have become increasingly sexy for the average widow, widower and orphan," says James Cox, a Duke University law professor who specializes in securities law."

SEC gives further proof for implementation of regulation

Hedge fund industry seemed to be blooming and growing in an era which lacked any enforceable regulation. They have for long know for their lack of transparency that often leaded to uninformed investors loosing millions. The loss could have been a result of a bad investment decision or due to wrong intention on the part of the fund manager.

Whatever be the case, the funds thrived in an unregulated environment. Therefore when SEC gave a directive to hedge fund mangers to register with it, all hell broke loose. No one wanted to be held accountable for losses to investor money.

Apart from the denial of letting themselves be tied down by regulation, what also has been the concern is the tediously long process of registration. And they know for a fact that this is not the end but just the beginning of difficult things to be expected in the future. SEC wants all the hedge fund managers to continuously report their performance.

What it therefore implies is that they have to keep on filling and submitting reports after reports. This obviously can put any one off. And hedge funds are making it a point to be heard. For example, Phillip Goldstein at the $85 million New York hedge fund Opportunity Partners is suing the SEC to get the rule overturned.

However the SEC is taking its order very seriously. It recently brought to light the case of Michael Tom who is the manager and part owner of the Burlington, Mass., hedge fund GTC Growth Fund. He was charged with five counts of insider trading. They are citing this and various such examples at various forums to make a point about the necessity for a regulatory framework. Financial Planning reports:

"According to the U.S. Attorney's office, Tom allegedly aggressively traded in common stock and options in Charter One Financial in 2004 after a former colleague tipped him that the bank was about to be bought by Citizen's Financial Group, a unit of Royal Bank of Scotland Group.”

Hedge Funds have become more transparent!

Strategic Financial Solutions, LLC, (SFS) recently made public its survey of the hedge fund industry for 2005. What is commendable is the extent to which the company has studied databases from across various sources. When compared to the last one year alone, there has been an increase of more than 16,000 hedge fund entries.

Also the team has closely examined hedge fund listings from twelve of the major hedge fund databases. The list includes Alternative Asset Center, InvestorForce, Barclay’s Global HedgeSource, CISDM, Cogenthedge, Eurekahedge Asian Hedge Fund Database, etc. The study was able to remove duplicates, tag CTAs, funds of funds etc by using sophisticated analytical and statistical procedures. This helped them to get somewhat more reliable information about the hedge fund universe.

The study found that there were approximately 12,250 hedge funds and funds of hedge funds in the various hedge fund databases. Out of this almost 10,500 of these funds reported performance data in 2005. What was also found is that 3,500 fund managers were part of the database and hence the study. This volume is a substantial component of the list of 4,300 registered Investment Advisors who have indicated to the SEC that they or an affiliate manage a private investment fund.

The study observed that the database showed that there were at least 8,100 single manager hedge funds and approximately 4,150 funds of hedge funds. The data also revealed that over 85% of the single manager hedge funds have reported their performance. Out of the total number of onshore hedge and offshore funds at least 82% and 87% have reported their performance in 2005. Even amongst funds of hedge funds the performance reporting was over 86%.

The study also showed that nearly $1.35 trillion is being managed by single manager hedge funds. What was an eye opener is the fact that more than 250 funds have surpassed the $1 billion mark. However the study did also conclude that the majority of the funds are still managing less than $25 million of assets. The survey also indicated that funds of hedge fund vehicles have invested around $700 billion in single manager hedge funds. But again the maximum number of funds of hedge funds still manages less than $25 million.

What the study is primarily hinting at is the fact that more and more hedge funds are getting transparent. As the database was collected from 12 sources that collect and compile information from the hedge fund managers, it is quite robust. The funds which form part of the data pool gave their performance report to at least one of the 12 sources of databases selected for the purpose and as such reflect the general trend in the hedge fund industry.

The observation that the hedge funds are becoming more transparent comes as no major surprise. Much has been said and debated in financial circles about the need and the viability of introducing transparency in the industry. More and more investors are today demanding some level of transparency in their dealings.

Of late quite a few hedge funds have either collapsed, filed for bankruptcy or have closed shop and run away. Any which way the general hedge fund investor is becoming more conscious of the need for transparency. Add to this is the fact that large institutional investors like pension funds are looking at hedge funds to pour in obnoxious amount of money. But their prime demand is some transparency. By making their progress public, the hedge funds are already on their path of garnering more funds for the now $1.35 trillion industry. Emedia Wire reports:

"In fact, general databases (covering all geographic areas and all strategies), averaged more than 550 “exclusive” funds each. Specialty databases, covering only funds of hedge funds, Asian or European hedge funds, each contained an average of nearly 100 “exclusive” funds.”    

Hedge Funds: Bermuda’s loss is Jersey’s gain.

The unanticipated outcomes from the European Union Directive on the taxation of savings income has lead several hedge funds to redomicile in Jersey. Two of the latest movers are hedge funds belonging to the Liberty Ermitage group.

First is it’s flagship hedge fund Liberty Ermitage Asset Selection Fund Limited, which has $700 million of assets under management. Liberty Ermitage Resources Fund Limited, which is the other hedge fund, has also moved with its asset base of $30 million. The law firm that helped then redomicile is Bedell Cristin.

The two funds are among the 24 or so other hedge funds that have made a similar move. The move is also due to the fact that Jersey has set up an Expert Fund Guide regime which is very healthy for hedge funds to operate. The regime streamlines the authorization process thereby enabling more sophisticated investment products to start operations. However it may be duly noted that they aim to maintain rigorous compliance criteria for all the funds. The Royal Gazette reports:

"According to the Jersey Financial Services Commission, it is possible to establish Expert Funds in a matter of days. The regime is particularly suited to hedge funds and other more sophisticated investment products aimed at the more experienced investor.”

Hedge Fund regulation: the final countdown!

As February 2006 comes yet closer, different issues, perspectives and arguments are doing the last minute rounds. But even after the deadline goes by one should not be surprised that yet newer issues come to light. There are several hedge funds that are resisting being registered. They are prepared to do what ever it takes to be as far away from the legalities of being registered.

There is one unique way by which the hedge funds are trying to escape the net. Increasing the ‘lock-in’ period. One of the ways that a hedge fund can avoid being registered with the SEC is by simply increasing the period for which the funds of investors necessarily have to be with the hedge fund. Though it may sound simple, it is not so. The partners of hedge funds themselves seem to be averse to the idea of their own money to be locked in. So what it means is that theoretically they are fine with the investor’s money being locked in but not their own. The SEC has made it amply clear that in order to avoid registration, funds invested by general partners, managing partners and their families must be locked up.

Of course the fees that they earn on the investment do not form part of the lock in period. It is their compensation and can use it as they want. The main reason being given for the hesitance of fund managers to register stems from their fear of being sued by their clients. They feel that by registering they will open doors for private civil litigation.

While hedge fund managers are finding ways to stay away from being registered, there are others who are making hay while the sun shines. A new insurance policy designed to protect hedge fund managers from lawsuits has been launched recently. This policy has been launched by Meyer’s group. In depth look into the market has revealed that less than 30% hedge fund managers are really protected from professional liability. This makes them quite vulnerable to collapses and long term credibility loss. With this policy however, the managers will be able to breathe a little easy. They would be sure of the insurance taking care of all the claims arising from allegation of errors and omissions, costs from regulatory investigations etc.

Apart from insurance there is yet another service that is benefiting from the situation. A new spying methodology has been launched by Corporate Resolutions, a New York-based background check and investigative firm. Here any employee of a company can call and give details of an illegal activity or harassment anonymously. The Street reports:

“Hedge funds emulate private equity because they need higher returns and new ideas outside of the realm of publicly listed companies. Private equity shops are turning to hedge funds as a way to retain their top analysts, says Poor.”    

SEC takes fraudulent hedge funds to task!!

SEC has yet again set an example for locating defaulters and for making them pay for their erroneous behavior. SEC and Commodities Futures Trading Commission (CFTC) had recently accused two Texas based hedge funds, their investment adviser of fraudulent market timing and late trading in mutual funds. The two funds in question are Veras Capital Master Fund and VEY Partners Master Fund and their adviser who is also in the list of accused is Veras Investment Partners LLC. The accused have reportedly paid a fine of $37.7 million to settle the charges. They have neither confirmed nor denied the allegations however.

The hedge funds are charged with using deceptive means to late-trade and market-time mutual funds. By doing this they were able to illegally profit thereby harming the interests of ordinary investors. The period for which they are being is from January 2002 through September 2003. They apparently also attempted to mask their true identity from the mutual funds during this time. 

Late trading can be quite harmful for ordinary investors. Here the professional traders buy and sell fund shares rapidly to exploit pricing inefficiencies. This harms the profits of average-long term mutual fund investors. The entire thing becomes illegal if the fund absolutely forbids anyone to make use of market timing and still someone goes ahead and does it without fully disclosing their true identity. When traders indulge in late trading, it implies that they are trading at the day’s closing price for the fund long after the deadline to do so has lapsed.

The settlement amount of $37.7 million will be used to compensate those investors who have suffered losses because of the act. The representatives and attorneys of the accused are tight lipped about the episode. Reuters reports:

“The SEC said the defendants agreed to pay about $35.6 million in disgorgement and $645,585 in interest, and Larson and McBride each will pay a $750,000 penalty. Larson and McBride were barred from associating with any investment adviser but will be able to reapply for association after 18 months, the SEC said.”    

Simpler Hedge Fund Laws for EU?

Can irregular regulation of the hedge fund market lead to stifling of a country’s economic growth? Yes seems to be the answer if we go by what European Fund and Asset Management Association is asking for. It is demanding that the European Union should have similar rules for governing European Union hedge funds and funds of hedge funds. It has given two ways by which this can be done.

As part of the first plan, the association has suggested the steps that can be taken in order to bring similarity of the various hedge fund players across the union. The other plan suggests guidelines to have a control on the kind of investors who would be eligible to buying different types of hedge fund products. The lobby is a representation of asset management worth about EUR 12 million.

This initiative has been taken seeing the irregularity existing in the market. The association has observed that though hedge funds constitute a substantial part of Europe's financial market rules governing then in various countries of the union are different. This gives ground for a lot of interactive problems amongst the member nations. As such it makes it difficult for several hedge funds to be able to sell their funds across European borders. Therefore the suggestions made by the association attempts to harmonize rules pertaining to the funds within the union. These rules suggest ground lines to indicate for example if the small time investor is allowed to buy the risky products. It has also asked for implementation of rules to clearly indicate what constitutes a hedge fund.

Charlie McCreevy, the European Internal Market Commissioner however has made it clear that he is not in favor of excessive new legislation on the issue. The Business Online reports:

“Europe's hedge fund industry has come under increasing attack this year. In April, John Sunderland, president of the U.K.'s Confederation of British Industry, criticized the sector's lack of openness and accountability.”

Will SEC be able to regulate the hedge fund industry?

What was being seen as a regulatory scare may actually be a hollow threat after all. SEC, in a bid to regulate the much opaque hedge fund world, had announced that by Feb 2006 all the funds have to be registered with them. Registration implied that now finds would not only have to do extensive initial paperwork but also be on their toes while maintaining daily records. The funds could be asked to come up with compliance reports as and when the commission would deem fit. Any irregularity or even a whiff of non compliance would be dealt with seriously. We had seen a lot of uproar amongst the hedge fund community. A lot of them scrambled to put their house in order and meet the deadline. But then there were others who took a deep look into what it really meant and the kind of time that they would be required to spend on it and then just gave it up. They preferred to stay away from all the action and instead spend their energies on what they do best – make money!

So what is happening is that most of the 8000 funds have decided to stay as far as possible from the action at SEC. And what is SECs response to this revelation? Well they have been honest enough in admitting that their current size may prevent them from putting the plan it to real time action. If not completely, they may not be able to totally govern and observe compliance owing to the ‘mammothness’ of the industry.

As they are severely outnumbered they admit that they would be able to at best conduct 1,200 to 1,500 inspections a year. There team of 450 is also burdened with monitoring of 8000 or so mutual funds also. The figure of 8000 hedge funds comes down drastically with the clause that only those funds that manage more than $25million or above assets need to currently register with SEC. Apart from this if they manage assets for less than 15 investors or if their lock-in period is more than two years; they are relieved of this chore.

The SEC provision actually includes most hedge fund advisers but those advisers who manage only private equity funds, venture capital funds and similar funds that require investors to make long-term commitments of capital are exempted from this rule. Given this SEC is still clueless about how many funds will actually require registering with them. Some smart hedge fund managers have managed to be overlooked by SEC by simply increasing their lock in period.

Analysts feel that in the given scenario, less than half of the total number of hedge funds has initiated the process of registering with the commission. A dismal figure if one takes into account that less than two months remain till the deadline set by SEC. SEC has taken cognizance of the situation and instead of blaming the shortage of staff for not being able to abide by its own rules, they are making the most of it. As of now they are focusing on large hedge funds and doing some scanning at the time of registration itself. Only time can tell if the work of the regulatory commission will bear fruitful results. Bloomberg reports:

“Nester added that the agency's enforcement mission will be bolstered by adviser requirements to hire chief compliance officers, the ability to screen individuals in the management companies and to ``identify practices that may be harmful to investors, and provide a deterrent to unlawful conduct.''

New product from Barclays for retail investors caused concern

Barclays has recently announced that it will be launching a unique hedge fund product in the near future. For this the big high street bank has joined hands with Fortune Asset Management. What is to be noted here is the fact that an ordinary investor will be able to access that product by merely investing £7,000. Hence retail investors are being targeted through this offering. FSA, the regulatory body based in London is apprehensive of all such moves that aim to rope in the unsophisticated small time investor.

Fund managers at Barclays however argue that they have included the clause of ‘anytime exit’ in the plan. This would allow investors to exit on a monthly basis and take away as much as 80% guaranteed of the highest price the fund has touched since they invested. This would make the product relatively safe. Add to this the fact that the investor will be keeping the money in his or her savings bank account and the same will be picked up by the managers for the purpose of investment. Therefore they will not be giving this money to Barclays.

The money will be placed in Barclays ‘Market Wizards’ Protected Plan which will be linked to the performance of Fortune’s Market Wizards fund. The Market Wizard fund has about 30 hedge funds in its portfolio. The selection is such that it promises to give positive returns in any type of market condition. The returns also are not too far fetched. They are pegged at 8.5%, net of all charges and fees. The fees being charged by Barclays is 2.4%. This figure includes a management fee of 1.5% and an additional 0.9 per cent to pay for the guarantee and other charges. What is also included in the plan is payment to advisers who will be selling this product as well as the underlying hedge funds. The fund will be managed by Jack Schwager who has 30 years’ experience in the hedge fund industry.

Though the offer seems to be quite exciting, industry analysts are rather Luke warm about the product on offer. They cannot see the logic of offering guarantee when the hedge fund concept itself is working properly. A well managed hedge fund will itself produce positive returns in all situations. Apart from this they also have reservations about how much the product will really be able to generate. This is considering the fact that there are several takers for the profits generates that are likely to shrink the profit pie. They include Barclays, Fortune, the hedge funds and the financial advisers. Hence the general feeling is that the investor will get very little by way of returns. Times Online reports:

“We have reservations about hedge fund products being marketed to UK consumers. We don’t yet know much about the new Barclays product, but the low minimum investment of £7,000 does raise concerns.” 

All hedge funds may not register with SEC

Just when one thought that almost every one in the hedge fund industry is scrambling to get themselves registered with SEC, there are exceptions. Not all the hedge funds are willing to register with SEC in February 2006. SEC has given February 2006 as the cut off month for all hedge fund advisors to register with it. However several funds have not done much in this regard till now. In fact half of the eight hedge fund representatives who attended a forum at Queens University of Charlotte have not done the needful up till now.

To cite an example, a New York based hedge fund manager Alex Porter feels that his fund does not need to be registered. He said that amongst the 8000 or so hedge funds there are some who definitely need to be regulated and his fund is not amongst them. He emphasized that his primary aim is to generate money and not to get tangled in several round of discussions just for the sake of registration. Charlotte’s official website reports:

“Of the eight funds represented in the panel discussion, about half have registered, said Porter, a Queens trustee who helped organize the discussion. His $2 billion New York-based fund, Porter Olin, has decided against the move.”

Deadline approaches fast for Hedge Fund Advisors

February 2006 is approaching fast and the hedge funds in the US have to dash for the finishing line. SEC has mandated that by February 2006 all the hedge funds above a certain cut off mark have to be registered with them. This is being done to ensure lower instances of frauds and collapse of hedge funds.

In this direction, SEI Knowledge Partnership hosted a web seminar to highlight the importance of completion of registration procedure before time. SEI is a global provider of asset management services and investment technology solutions. The seminar saw a congregation of several regulatory experts who spoke on different aspects of the registration process. They emphasized up on the point that the funds should not under estimate the extent of registration formalities that one has to take care of.

This web seminar was part of the compliance series being organized by the SEI Knowledge Partnership in collaboration with SEI’s Compliance Advantage program. Eight such seminars have already been successfully organized since SEC mandated compulsory registration.

The seminar brought out the fact that the Chief Compliance Officers should allow sufficient lead time for preparation of the first mandatory annual review of their adopted compliance programs also. Therefore it is not sufficient to just get over with filling up ADV forms. Several CCOs have to make their submissions of their first mandatory annual review latest by March 2006. The experts also stated that a lot of time is required for developing policies and procedures that the hedge funds have to develop to thrive in a regulated environment.

SEC can examine a hedge funds procedures any time after 1st February 2006. Therefore speeding up the registration formalities has to be on the top of the agenda. What should also not be forgotten is the fact that should there be a blaring fault in the registration process; the SEC will not take it kindly. Hence every thing has to be done in a sequential and fool proof manner.

The panelists of the seminar discussed the things that mutual fund CCOs must do to prepare for their first compliance program review and update

The issue of registration gains more importance in view of the fact that today even the retail segment is being pulled to the funds. These retail investors have lower propensity for risk as they do not have the deep pockets that institutional investors or high net worth investors have. The latter are the primary target audience for hedge funds. The less transparent financial instruments are today attracting investors with a fraction of amount that was earlier required to be invested. S-ox reports:

“Volk urged hedge fund advisors to go on the assumption that they could be subject to an SEC exam any time after February 1st. “When the SEC arrives, they will expect to see that since February 1, 2006 you’ve been conducting your business in a manner consistent with their requirements,”

Ontario Securities Commission considering revising critical Hedge Fund rule

Canadian regulator, Ontario Securities Commission (OSC) is considering removal of exemption for principal protected notes. This might adversely affect the inflow of retail investor money into the already small Canadian hedge fund industry.

Currently the law permits hedge funds to sell even to smaller retail investors. They are able to do this via principal protected notes – PPNs. Through PPNs, investors are assured of getting back their principle as well as the returns generated through exposure to one or more underlying hedge funds. The exemption is generally referred to as "bank-debt exemption". Through this exemption, large banks or financial institutions can issue debt without filing a prospectus. This also allows the PPNs to stray from the rule of having only accredited investors who are generally wealthy individuals who pour in large amount of money into the funds. 

Generally the affluent class is considered more hedge fund investment savvy and is also more risk friendly. Because of the exemption, the product is sold to even those investors who do not understand the nuances of the complicated investment tool. As such it may be somewhat risky for them as they may not understand the concept of volatility. OSC is considering this action after the recent collapse of Toronto-based firm Portus Alternative Asset Management Inc. The fund was using PPNs and its collapse affected over 30,000 investors. Portus’s PPNs were guaranteed by Societe Generale which is a large French banking group.          

Five years back, the Canadian hedge funds industry was worth only $4 billion. Now it manages assets of over $30 billion. Analysts feel that PPNs have chiefly been responsible for fueling this growth. Canada.com reports:

“Mr. Moore is heading an OSC committee looking at changing the way hedge funds are regulated after the Portus scandal this year. The Financial Post first reported the regulator's review in August.”

Strategic Investment Dialogue attempts to give a fresh perspective to Hedge Fund Investing

When an industry like Hedge funds is growing at such a phenomenal rate, it is imperative to do a reality check and situational analysis every once in a while. This helps the managers and investors to gain broader insights into the industry which is so lost in the daily ups and downs in their race towards generating returns. Last month saw the coming together of institutional investors, investment managers, investment advisors, academics, and regulatory experts to do just this. The forum was sponsored by Strategic Investment Group. And the event aptly called the ‘Strategic Investment Dialogue’ had its second annual gathering in San Francisco towards late October. 

The event was organized to promote meaningful discussions among fiduciaries and leaders of the investment community on issues which are relevant to institutional investors. Key discussions revolved around ways and means to maximize returns while minimizing over all risk. More specifically the participants explored the underlying trends toward securitization of assets and associated processes. Understanding how processes relating to decoupling and re-coupling alpha and beta and how they are likely to develop. The forum also brought together sharing of success and disaster stories relating to the implementation of various strategies. The invitees also discussed the practices for governance in an era of increased scrutiny and regulation.

President and CEO of Strategic Investment Group, Hilda Ochoa-Brillembourg said that the initiative was necessary in the context of humongous changes that are taking place in the marketplace today. Investors and hedge funds alike are affected by the changes taking place in this very dynamic market.

The attendees were asked to vote on several key issues in order to gauge the overall opinion of the industry. They voted and gave comments on various topics including impact of regulation, use of strategies and how to reduce key areas of risk. All the ideas and comments are being compiled by Strategic Investment Group. The compilation will be aptly called - Absolute Returns, Relative Risks: The Changing State of the Art in Strategies for Investing in Hedge Funds. The report will be available in full form to the attendees. However excerpts and key highlighted issues will also be available to the public at large. Interested managers and investors can request the same from Strategic or by visiting www.nationalstrategicinvestmentdialogue.com.

Strategic Investment Group was founded in 1987. Its initial objective was to provide discretionary integrated portfolio solutions that would combine active portfolio management and rigorous risk management. It also aimed to open architecture manager selection. Strategic Investment Group manages approximately $10 billion in assets as on today. PR Web reports:

“The session examined the challenges and complexities associated with successfully harnessing the power of hedge funds to maximize returns and reduce key areas of risk.”

New hedge fund association set up to provide un-influenced information

The hedge fund industry has up till now known to be highly secretive in its operations. Some frauds and scandals and loads of ups and downs later, some regulations are being put into place. But the point still remains, who do you go to for some reliable advice? Hedge funds themselves will never say any thing bad about themselves. The regulators will not have the complete information, because if they had all the information, no fraud could possibly take place. Then there are hedge fund consultants who can advise potential investors. But then again, they take fees from hedge fund managers and hence their recommendations can be considered doubtful.

Connecticut Hedge Fund Association seems to have an answer to this problem. They are looking at becoming a kind of clearinghouse for information for investors and others in the industry. They will be providing critical un-influenced information about the various strategies or approaches in practice. Along with this they will be providing information on what all information an investor should demand from his hedge fund manager and how he can actually sense a fraud brewing. Being fore warned, the investors can reduce allocation or pull out altogether thereby reducing their overall risk.

The group’s commitment to the cause is reflected in the constitution of its board itself. The group members hail from different constituents of the industry including hedge funds, institutional investors, foundations, consultants, pension funds and others. The group is headed by Bruce McGuire as its president and as of now has some 40 member firms so far. Reuters reports:

“There is no lack of issues in an industry that has doubled in asset size in the last five years and now includes an estimated 8,000 funds, with the hedge-fund-rich area of Greenwich, Connecticut, considered something of an epicenter for the industry.”   

FSB regulator for making hedge funds more palatable for retail investors

The appearance of Jurgen Boyd at the Hedge Funds World Africa conference took several participants by surprise. Mr Boyd is the Financial Services Board (FSB) collective investment scheme regulator. Several hedge funds had put up stalls at the venue and were in the process of distributing leaflets. This activity of marketing the product(s) to the public is not allowed according to the hedge fund laws. However, the fact remained that that the seminar had a majority of delegates who were representatives of the industry itself. This definitely allowed them some relief to the participants but the organizer might be in some problem with the regulator over the issue.

At the conference My Boyd impressed up on the delegates that the FSB was in the process of creating a modified version of Collective Investment Schemes (CIS) that would allow them to function as hedge funds primarily aims at retail investors. The Hedge Fund CIS would be allowed to use leverage and hence enable smaller investors to be part of the larger hedge funds investment community. Money Web reports:

“To get around legislation, hedge funds regard themselves as “investment clubs.” Investors are members of the club rather than of the public. A similar tactic has been adopted by a number of unlisted-share peddlers around the country.”

FSA paper on risk and regulatory engagement hedge fund gets a mixed response from AIMA

FSA, the premier regulatory authority of hedge funds in UK had presented a paper titled - Hedge funds: A discussion of risk and regulatory engagement. The paper was coded DP05/4 and was presented to AIMA in the month of June this year. The paper was prepared after in-depth industry analysis and presented its views on hedge fund regulation within UK. AIMA had immediately got to work of analyzing the paper and the recommendations made therein. For this it had brought together professionals in the field so as to form the largest working group of members that had ever been assembled to work on any regulatory consultation. It was well represented by all the sectors of the alternative investment management industry in the UK and Ireland. The association prepared its comments and suggestions based on the paper earlier this month. Following are some of the observations made by the association.

The crux of the response was that one has to make sure that regulation should not weaken the UK’s competitive advantage. It acknowledged comments such as those pertaining to the benefits that hedge funds bring to financial markets and also the emergence of UK as the centre of hedge fund management in Europe. It however stated that the comments made on the possibility of hedge funds creating havoc in the financial market may be half baked. Actually, the funds are no more disastrous than any other market player. Therefore there is no need to be over cautious about their actions. It did recognize that several hedge funds have experienced a downfall, but then it is a natural phenomenon in a ‘free market’. This should not be construed as a sign of ill health of the industry. 

On the issue of increasing fraud within the industry, AIMA commented that the instances of frauds are no more than those experienced by any other industry in the financial market. Referring to the highlighted need for smaller or bigger players to have more or less supervision, the association stated that the size of the player should not have any bearing on the need for being supervised. It said that both small and large managers are likely to employ strategies that can make them ‘high impact’. 

The association also indicated that there was no need for newer permissions for hedge fund management and/or prime brokerage. Should the changes occur, it added, the same should be notified to the FSA up on commencement by the industry participants. The response also included AIMA’s opinion on the issue of valuation saying that it may not be the best way forward. It observed that the issues raised in the context in the discussion paper are not unique to the hedge funds industry alone and can be seen in other industries playing in the financial markets. It added that the usage of third party administration in the European and Asian hedge fund industry was quite a done thing.

The Alternative Investment Management Association (AIMA) has over 270 corporate members in the UK. The Hedge Week reports:

“AIMA has welcomed the establishment of the FSA’s ‘centre of hedge fund expertise’, assuming that it will be (and remain) properly and adequately resourced, and suggests that it be allowed to ‘bed down’ before any other action is considered.”

Experienced staff can avert hedge fund collapse

Though hedge funds industry has grown in size, the infrastructure that is required to ensure seamless operation and reporting has not grown proportionately. Most of the hedge funds have very small staff quotas and rely on accounting firms to provide risk management and financial systems expertise. As such they are more often than not prone to fraud risks. The fund managers face dearth of talent saying that they find it a difficult activity to recruit staff that is capable of coping with the demands of assurance and advisory work around the funds. This needless to say throws the doors open for inconsistencies to creep in.

Even Amin Rajan, CEO of research firm Create, confirms that as the industry is bogged down with intricate techniques it is difficult to recruit individuals with the required qualification and expertise. With the blow up of futures broker Refco last month, one thing is for sure, more such instances can happen if the industry continues to move the way it is doing currently. Financial Director reports:

“Experts have warned that firms are finding it difficult to recruit staff capable of coping with the demands of assurance and advisory work around the funds, posing a substantial risk to investors and hedge fund managers.”

Chapwood Capital launched to help start up hedge funds cut their business risks

Now investors of hedge funs in the US can have some tension fee nights. Knowing their interests are being taken care of by experts can be very reassuring for any investor. For Hedge Funds in particular where returns can be expected to be higher than the average financial investments, the risks too can be really high. What if one had a reliable third party that could help you keep a reality check on ones investment?

As an answer to this, Chapwood Capital a US based investment firm has recently been launched. The firm promises to offer investors in hedge funds a way to cut the business risks of investing in hedge funds. They are offering services like legal and compliance duties, accounting, reporting and risk management apart from covering operations and technology.

Chapwood's chief executive Craig Pollak stated that according to some estimates, 15 to 25 percent of new hedge funds are unable to make it through the first year of their operations itself. This may even be true in spite of them having strong investment skills. The reason for this lies in the fact that these new startup hedge funds may be lacking basic experience in handling the day-to-day running around involved in a business of this nature.

What Chapwood is offering to hedge funds is a fee sharing arrangement wherein it provides all the necessary help to the fund. For instance it has appointed a Chief Financial Officer with over 12 years of experience in the Hedge Fund industry to help its partners through the hedge funds maze. This many would agree is a luxury and can be afforded by bigger hedge funds. In this case, the CFO will serve as a third-party risk monitor or outside reviewer. The caveat here is that Chapwood is interested in partnering only with experienced money managers so that their partnership will be truly worthwhile.

Chapwood Capital will cater to the demands of investors such as institutions like pension funds and also wealthy investors.  Today.reuters.com reports:

"We're only going to partner up with experienced (money) managers," said Pollak, who was previously managing director and head of product development at U.S. investment firm FrontPoint Partners.

EU internal market chief not in favor of binding hedge funds

Charlie McCreevy, EU's internal market commissioner feels that alternative investment funds such as hedge funds should not bound by tight regulations. He was speaking at a hearing of the European Commission on future legislation for investment funds when he put forward his views. He stressed that the industry has been moving on quite well with out much regulation in place. As such there is no need to disrupt something that is working well already. By attempting to bind these investment funds with tight rules and regulations one would kill the spontaneity and thus the growth rates that these funds have been enjoying.

He pointed out that the funds in Europe have grown fourfold in the past 12 years and currently