Managers Shrug Off Worries Over HF Registration

Nov 18 2005 | 8:44pm ET

With less than three months to go before laws requiring hedge funds with more than $25 million in assets under management to register with the Securities and Exchange Commission come into affect, the buzz about their possible impact seems to be just that, buzz. Industry insiders at the Fourth Annual Fund-of-Funds forum in New York this week spoke about the new regulations, and the general consensus was that the laws will neither prevent fraud nor will they harm the hedge fund industry.

"We don't look to the SEC to do our due diligence," chuckled Patrick Egan, president and chief executive of Pennsylvania-based fund-of-funds firm Attalus Capital, speaking on a panel at the conference.

"Anyone who invests in hedge funds has to do their own, thorough due diligence," said Scott Gregory, head of institutional fund-of-hedge-funds distribution at Morgan Stanley Alternative Investment, speaking on the same panel. He said this includes conducting background checks, understanding back-office policies and procedures, meeting with a fund's prime broker and auditor, and looking at a fund's filings.

Egan and Gregory also said that if a hedge fund does not register with the SEC, they would still consider investing with that fund.

The SEC estimates that by Feb. 1 of next year, 80% of hedge funds will have registered. The remaining 20% will utilize loopholes, such as locking up investor money for two years or not taking in new money.

SEC Focuses On 'High-Risk' Advisors

Meanwhile, despite many managers' general ambivalence toward hedge fund registration, some do resent the extra paperwork and expense, and most agree that having to undergo an SEC exam would be a headache.

Gene Gohlke, an associate director in the SEC's Office of Compliance and Inspections, says that the Commission will conduct between 1,200 and 1,500 exams per year on what it considers "high-risk" investment advisors. As of the end of October, there were approximately 9,000 advisors registered with the SEC, meaning that statistically, there is a one-in-six chance of a firm being investigated in any given year.

Gohlke said some factors that cause a "high-risk" flag to be raised at the SEC include a fund having an unknown prime broker or auditor, or no prime broker or auditor at all. He also warns investors to watch out for firms that have an affiliated broker/dealer with which they place most of their trades.

"We don't bite, we are there to protect the investors," said Gohlke, who added that come Feb. 1, "in regards to the exams, I don't think we'll be doing too much differently."

SIDEBAR:

WHAT THEY ARE SAYING ABOUT SEC REGISTRATION

• "I think a Good Housekeeping seal of approval is what the SEC will bring." — Mark Overley, managing director, head of structured products marketing, HSBC Bank

• "We don't look to the SEC to do our due diligence." --  Patrick Egan, president and chief executive, Attalus Capital

• "Regulation may hurt the industry at first, but it will help it in the long-run." — Victor Park, managing partner, Alternative Asset Investment Management.

• "As a result of regulation, you will see less investors starting up hedge funds." — Ed Egilinsky, director, Rydex Capital Partners


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