Hedge funds may see regulation revived: investor

Date: Wednesday, April 11, 2007
Author: Svea Herbst-Bayliss, Reuters

NEW YORK (Reuters) - Just as hedge funds think they have escaped the tightening of loose current regulation, one large investor expects them to face fresh regulatory pressure after the Bush administration leaves office.

"If the next U.S. president has a more populist view, then hedge funds will be under attack," said Phillip Maisano, who invests roughly $5 billion in hedge funds as head of alternative investments at Mellon Asset Management, at the Reuters Hedge Funds and Private Equity on Tuesday.

The Bush administration this year rejected proposals that would give the U.S. government the right to review hedge funds, and last year a federal court threw out a rule that would have authorized the Securities and Exchange Commission to register hedge funds.

Hedge funds celebrated those decisions, but Maisano cautioned the world's estimated 9,000 funds against thinking they are out of U.S. regulators' sights forever, especially now that more pension funds are putting average investors' money into these portfolios.

"We are already thinking who's next after this administration leaves and what it will mean," he said.

He expects the rule that requires hedge funds of a certain size to register with the SEC to be revived in the coming years.

That rule, briefly in effect last year, allowed SEC investigators to audit hedge funds' books every year. The reviews, analysts argued, would help crack down on fraud in an industry where assets have doubled to more than $2 trillion in the last three years and some big frauds have made headlines. 

Hedge fund managers' enormous salaries -- last year five managers took home $1 billion or more each -- is fanning some public outrage that could easily translate into more pressure to put these funds on a tighter leash, Maisano said.

"All that scrutiny is a little dangerous as it raising attention in Washington and may prompt investigations again," he said. He added that many managers' out-sized egos lead them to think they should be able to affect policy but could ultimately backfire on them.

Currently Rep. Barney Frank, a Massachusetts Democrat who heads the House Financial Services Committee, is scheduling hearings about the hedge fund industry.

At the first one held last month, seven panelists -- hedge fund managers, experts and lobbyists -- told lawmakers that new regulation would stifle innovation. But they accepted that better record keeping, even if mandated by lawmakers, may not cramp their style.

Maisano said the SEC will have a hard time keeping track of all the hedge funds as the agency faces its own budgetary strains, and he expected political pressure to build toward reviving the rule.

He also said he favors the SEC proposal to raise the amount of money investors need to be able to have to qualify to make hedge fund investments.