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Hedge Fund Group Girds for Regulatory Struggle

Date: Tuesday, February 10, 2009
Author: Carol E. Curits, Securities Industry.com

Coming off a year when the average hedge fund lost 20 percent of its value, the Managed Funds Association (MFA) said it has accepted the inevitability of regulation and is shifting its focus to making the changes as industry-friendly as possible.

The hedge fund industry is at “a critical time” as it is confronted by regulatory pressures, said Eric Vincent, chairman of the MFA and president of New York-based Ospraie Management, at the group’s Network 2009 conference in Key Biscayne, Fla. on Feb. 9. By some estimates, the industry could lose as much as 50 percent of its assets under management as a result of the ongoing credit crisis.

“Regulation of some sort is a certainty,” said Richard Baker, president and CEO of the MFA, the industry’s main trade association. Baker, a former member of the House Financial Services Committee, acknowledged that hedge funds face “continuing scrutiny over our responsibility to investors,” due in part to the turmoil surrounding Bernard Madoff’s alleged $50 billion Ponzi scheme, which went undetected by regulators.

“The SEC is under pressure like it has never been in its 75-year history,” said Stuart Kaswell, EVP and general counsel of the MFA. “They are horribly embarrassed that they missed the Madoff scandal.” Kaswell, who is part of the group’s new legislative and regulatory team, joined in December from law firm Bryan Cave in Washington, D.C.

In this environment, said Kaswell, hedge fund regulation of some sort “will be a big-ticket item for us all.” Other areas certain to be addressed by a reenergized SEC, he said, include short-selling disclosure rules, a clearing agency for credit default swaps, more oversight of credit rating agencies and bolstered enforcement. “The SEC is positioning themselves as a strong regulator,” he said.

The MFA plans to spend “an enormous amount of time with members of Congress and policymakers, to try to inform the debate,” said Roger Hollingsworth, EVP and managing director of government relations. Previously deputy staff director and senior policy adviser to Christopher Dodd, chairman of the Senate Banking Committee, Hollingsworth started at the MFA in September. Legislative initiatives designed to restructure the financial regulatory landscape will be a significant part of the 2009 Congressional agenda, he added.

Calling the acceptance of regulation part of a “curve of comprehension,” Darcy Bradbury, SVP of New York-based hedge fund DE Shaw & Co., said that the industry is going to be working to “inform the debate quietly.” Regulation is coming, said Bradbury--“our job is to make it as productive as possible for our members.”

However, at least one hedge fund executive questioned whether requiring hedge fund advisers to register with the SEC--the plan currently under consideration by Congress--goes far enough. “Mutual funds are required to have a separate custodian,” noted Douglas Makepeace, president of New York-based Sperry Fund Management, adding that many hedge funds self-clear and do not have an independent custodian, as was the case with Madoff.

“You have to do something to ensure that the hedge fund manager will not take the money to Brazil,” said Makepeace. “We should be concentrating on the custody part. If you are going to be registered, make sure that it works. You should have a requirement for a separate custodian.”

“Registration in itself is not a remedy,” agreed Baker.