OT Hedge Funds Under SEC Spotlight
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By Kevin Drawbaugh
WASHINGTON (Reuters) - Hedge fund industry advocates on Wednesday told U.S. market regulators, amid a continuing investigation of the $600-billion industry, that it is sound and needs no major regulatory crackdown.
But at the outset of a two-day U.S. Securities and Exchange Commission (news - web sites) roundtable on hedge funds, SEC Chairman William Donaldson warned industry participants that the roundtable did not mark an end to the SEC's inquiries.
"The discussion does not end when we leave here tomorrow," Donaldson told a hearing room packed with managers, consultants and others active in a business that has grown dramatically in recent years, but remains largely beyond government oversight.
Asked whether the SEC might require hedge funds to register with the agency, Commissioner Roel Campos told Reuters, "It's one thing we'll consider."
He said he expects SEC staff to put forward recommendations to the commission as a result of the roundtable.
Hedge fund advocates taking part complained that their business, itself increasingly managed by large institutions striving to become more transparent to investors, is sometimes unfairly cast as secretive and shady.
At the same time, hedge fund consulting group Tremont Advisers' co-chief executive Robert Schulman said it would be "death" to the industry if it were required to disclose its investment positions, as some critics have suggested.
Hedge funds are loosely regulated investment pools, and aided by the loose oversight that allowed them to invest in almost anything -- unlike mutual funds -- some hedge funds delivered stellar returns in the 1990s bull market.
Favored as investment vehicles by the super-rich and large financial institutions, such as pension funds and endowments, hedge funds are increasingly reaching into the middle classes.
This so-called "retailization" is one of the key concerns of the SEC, which warned in February that hedge funds posed a growing danger to investors.
The SEC said it had seen a sharp uptick in fraud actions brought against hedge funds, with 12 SEC hedge fund fraud cases in 2002 versus five or fewer in each year from 1998 to 2001.
"Over the past few years, hedge funds have become more popular and continue to grow in size," Donaldson said.
Close to 5,700 hedge funds are operating in the United States today with $600 billion in assets, up from far fewer funds and only about $50 billion under management as recently as 1990, the SEC estimated.
The bear market has caught up with hedge funds, but some continue to provide above-average returns. That and the reputation for huge profits gained in the 1990s are helping the industry reach down to attract more middle-class investors.
"While there are frequent reports of high returns for hedge funds, there are reports just as frequently that highlight possible areas of concern," Donaldson said.
Among these are "potential conflicts of interest, questionable marketing techniques, valuation concerns and the market impact of hedge fund strategies," he said.
The SEC's hedge fund probe is multi-pronged, but one aspect focuses on "funds of hedge funds," which gather assets of small investors to get them in the high-stakes hedge fund game.
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