More Than Half US-Based Hedge Funds SEC-Registered

Date: Tuesday, February 3, 2009
Author: Dan Molinski, Dow Jones Newswire

A little more than half of U.S.-based hedge funds are already registered with the Securities and Exchange Commission, according to a new study that comes amid efforts by lawmakers to require virtually all of them to do so.

Chicago-based Hedge Fund Research said Monday nearly 55% of hedge funds located in the U.S. are currently registered with the SEC. It said those SEC- registered hedge fund firms manage nearly 71% of all U.S.-based hedge fund capital.

Globally, hedge fund firms registered with the SEC manage approximately 60% of the $1.4 trillion in total hedge fund industry assets, HFR said in a statement. It added that nearly two-thirds of the capital managed by funds of hedge funds is managed by SEC-registered firms.

The study comes after Sens. Charles Grassley, R-Iowa, and Carl Levin, D-Mich., on Thursday presented a bill to Congress that would force hedge funds to register the SEC. The senators argued that the current financial crisis demonstrates the need for more transparency in markets, and said registration of hedge funds would be "so the government knows who they are and what they're doing."

The SEC is a federal regulator whose stated mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Hedge funds, the senators added, should be regulated because they control massive sums of money and the failure of some of these firms could destabilize the overall economy.

Ken Heinz, president of HFR, said he hoped the new HFR study would provide to the general public and lawmakers some perspective on the issue of SEC registration.

Hedge fund managers have made few public comments related to the specific legislation proposed Thursday. During testimony on Capitol Hill back in November, top managers indicated the hedge fund industry as a whole might be willing to back more regulation to improve transparency.

HFR's Heinz said conversations he's had recently with leading hedge fund managers suggest they still support some type of increased regulation. However, he said they wonder if a "more logical" step may be additional regulation of the banking and investment banking sectors.

"To regulate the providers of leverage, and centralize the clearing of over- the-counter derivatives may (do more to) reduce systemic risk, if that is the goal" of the legislation, Heinz said.

Hedge funds are often defined as unregulated investment pools for high-net- worth individuals. But pension funds, university endowments and other institutional investors have recently become big investors in the industry as well, raising concerns about their lack of oversight.

The industry suffered its worst year ever in 2008, with net outflow of $154 billion in capital, HFR said. That is a sharp reversal from the record inflow to hedge funds of $194 billion in 2007, it said.

Amid the massive outflow from hedge funds, many of them have put up so-called gates that block investors from withdrawing their money. The funds that have halted redemptions have argued that they have done so to protect investors who want to remain in the fund.

-By Dan Molinski, Dow Jones Newswires; 201 938-2245; dan.molinski@dowjones.com