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SEC boss warns hedge funds risk disaster

By Nancy Kercheval in Washington
May 14, 2005
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Pressure on hedge fund managers to deliver market-beating returns may lead to "disaster" and supports the need for more regulation, US Securities and Exchange Commission chairman William Donaldson said.

"If history is any guide, it is just this sort of pressure that can lead otherwise well-intentioned professionals to pursue practices that can ultimately result in disaster for the investors that they serve," Mr Donaldson said in prepared remarks for a Foundation Financial Officers Group meeting in Washington.

Last October, the SEC ordered most hedge fund managers to register with it and undergo inspections and reviews of their book-keeping. It expects about 1000 funds to sign up by 2006.

Mr Donaldson has pushed for more oversight as the popularity of hedge funds, a market he estimated at $US1 trillion ($1.3 trillion), attracts smaller investors.

Mr Donaldson said he was concerned about the "crowding of hedge funds into similar investment strategies and the difficulty that this implies for hedge fund managers eager to post market-beating returns".

Hedge funds "have sophisticated models, a sense of their limits and market experience", Robert Merton, a Nobel Prize-winning economist and co-founder of hedge fund Long-Term Capital Management, said in an interview in New York.

Concern about hedge-fund investments intensified last week when Standard & Poor's cut its credit ratings on General Motors and Ford to junk-bond status.

"These can be very volatile times," said John Gaine, president of Managed Funds Association, which lobbies for 800 hedge funds. "The downgrading of GM is a historic event. I don't know if it will rise to Russia's default of its debt; I hope it doesn't. But in terms of real facts, I don't know that anything's really happened."

Mr Donaldson had forecast disaster in the industry before, Mr Gaine said.

"That's a theme he consistently has been sounding for years."

Phillip Goldstein, a portfolio manager for Opportunity Partners LP, filed a lawsuit challenging the SEC's authority to regulate hedge funds.

"There's no evidence of anything amiss with hedge funds," he said. "The SEC seems to be desperate to get hedge funds under its authority by any means."

Mr Goldstein said he believed the authority to regulate needed to come from Congress.

The new SEC registration rule, to take effect in 2006, requires managers running hedge funds with at least 15 US clients and $US30 million in assets to register as an investment adviser with the SEC. Advisers must give the agency such information as their names, addresses and how much money they manage.

Hedge funds, which typically require investors to have a net worth of at least $US1 million, bet on falling as well as rising securities prices and often use leverage, or borrowed money, to boost returns.

Bloomberg

http://www.smh.com.au/news/Business/SEC-boss-warns-hedge-funds-risk-disaster/2005/05/13/111584336989...

http://cmkxdiamond.proboards32.com/index.cgi?board=general&action=display&num=1116194410