In proposals that would go some way toward leveling the playing field between hedge funds and mutual funds, a senior Securities and Exchange Commission official is suggesting that hedge funds be offered the inducement of going public in return for opening themselves up for, at least, limited inspection. Douglas Scheidt, chief counsel and associate director of the SEC's Division of Investment Management, wants to exact a series of quid pro quos from any hedge funds that want to apply to go public. The growing market power of hedge funds stems ultimately from the secrecy that gives them an edge over mutual funds. Scheidt would have the SEC condition public sales of shares on hedge funds agreeing to have annual audits, get third-party portfolio valuations, have standardized returns and provide a "minimum amount" of disclosure.
Scheidt, speaking at the May 14-15 SEC roundtable on hedge funds, was silent on subjecting hedge funds that get money flows through private placement to further regulation, such as making hedge fund advisors register under the Investment Adviser Act or the funds themselves register under the Investment Company Act. If his proposals were adopted, mutual funds setting up hedge funds would still have the option of being unregulated. But in the competition for investors in the wider market, where hedge funds have been trying for over a year to get the SEC to let them run tombstone ads, the Scheidt approach would exact revelations from hedge funds that it might not be easy for them to make. Said one mutual fund source, "disclosure and hedge funds don't go together."
Scheidt's boss, SEC Chairman William Donaldson, made an appearance on Capitol Hill last Thursday testifying on the same subject. Pressed to say he favored making hedge fund advisors register under the Investment Advisers Act, Donaldson shied away. But he repeatedly asserted that, "We need to know what's going on inside them." Asked what he wanted to know, Donaldson said the contents of their books and records and their valuations. Donaldson emphasized his agency would take a lot more input from various quarters before reaching decisions. It would be sometime in "early fall," he added, before staff recommendations would be made to the Commission. These, he said, would be immediately made public.
At the roundtable, Harvard University law professor and former Fidelity Management & Research vice chairman Robert Pozen said the SEC had two choices, either to regulate hedge funds--in which case, he said, they would go offshore--or "loosen a little [for mutual funds] the regulations on short selling and performance fees." Later, other knowledgeable mutual fund sources were skeptical that the industry could get much loosening out of the SEC.
George Soros shorted the dollar heavily in advance of Bush's Congress increasing the debt limit ceiling to $7.3 trillion, an inflationary move that has sent stock prices soaring 20% over the past several months. Soros will not make his short covering on the dollar as widely public as the reflexive effect of contrarian postulates begin to once again reverse the trend in the value of the dollar and push the DOW to real fair market values. The DOW and all NYSE listed stocks trading above 2x net present tangible book value are highly over priced. Rotation is setting in.
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