Top five hedge fund trends for 2007

Date: Thursday, January 18, 2007
Author: Lauren Keyson, Forbes.com

Investors have always been fascinated by hedge funds--the vast amounts of money involved, the secrecy, the lax regulation and the promise of wealth. But that may all be changing for individuals as hedge fund investor profiles change, as the Securities and Exchange Commission institutes new rules, and as mergers and acquisitions abound.

Here is a look at the top five hedge fund trends for 2007:

1. The changing hedge investor profile from individual to institutional will drive fund managers to have more formal procedures and controls.
Actually the investor profile has been changing for years. Once foundations and endowments like Harvard and Yale began to get involved, the news got out that these types of organizations were starting to invest. Public pension funds followed suit, including such nonprofits as CalPERS.

2. The new definition of a "qualified investor" will knock some people out of the game who might otherwise have entered it.
The newly proposed accredited investor rule, No. 501(a), is actually an amendment to the old private offering rules in the Securities Act of 1933, which said that hedge funds were not allowed to offer their services to anybody with less than $200,000 in individual income or $300,000 in joint spousal income in the two most recent years, along with a million dollars in investable assets (excluding personal residences).

3. There will be continued argument and confusion over the level of hedge fund oversight.

4. In order to steer away from deception, hedge funds will no longer be as covert.
Another SEC amendment to the original anti-fraud provision under the Investment Advisers Act says that it is against the law for hedge funds to deceive their clients. The proposal would make it deceptive and manipulative for investment advisers to pool investment vehicles to make misleading statements in the course of business. The rule would apply to all these advisers, whether or not the adviser is registered under the Advisers Act.

5. There will be more M&A activity in hedge funds, with bigger-name companies getting involved.
In the last year, more institutional investors are getting into the game, compared with individual investors. Historically, we don’t necessarily know what the level of M&A activity has been in the hedge fund world because of private targets. It’s possible there were some deals going on and nobody knew about them, or they just weren’t prominent in the market, because nobody really knew what was going on.