Hedge Funds Feel More Heat

Thu., May 04 - CNNMoney.com (Excerpt)

By Amanda Cantrell 

NEW YORK - It's only been three months since the Securities and Exchange Commission's rule requiring hedge fund managers to register as investment advisers went into effect, and regulators are already cranking up the heat on these funds even more.

Hedge funds, which are private investment pools limited to wealthy individuals and institutional investors, now manage $1.2 trillion in assets, according to Chicago-based hedge fund tracker Hedge Fund Research, and though they are limited to the wealthy, more private and public pension plans are investing in these funds on behalf of regular people.

Also, regulators and elected officials have expressed a desire to learn more about hedge funds because these funds operate in the public markets.

"We have clearly seen enhanced attention by the SEC on registered hedge funds in the market with respect to the (examinations) that have been conducted and have seen, in certain circumstances, a very thorough examination of the hedge funds themselves," said Jedd Wider, a partner in the business and finance practice of law firm Morgan Lewis.

Wider said this is "a clear indication that the SEC is taking its role with respect to registration very seriously" and added that hedge fund managers can and should expect this attention to continue.

Regulators smarten up on funds

One positive, [Ron Geffner, a partner at law firm Sadis & Goldberg] noted, is that the examiners seem to have improved their understanding of the industry since 2002, when the SEC first began circulating requests for information to hedge funds as part of a study of the industry.

People in the business say the questions the SEC asked then betrayed a lack of understanding about the publicity-shy industry, but now, the questions the SEC is asking are more sophisticated.

"In the last 12 months they have gotten up to speed in dealing with the hedge fund community," said Geffner.

That's in part because the Commission has beefed up its training program for examiners, requiring some to take a certification exam for "alternative" investment professionals. Alternative investments are funds that operate outside traditional stock and bond fund formats and include hedge funds, private equity and managed futures funds.

Craig Asche, executive director of the Chartered Alternative Investment Analyst Association (CAIA), said the SEC began participating in its examination program as a way of learning what kind of questions it should be asking hedge funds during exams.
The group administers the CAIA designation to alternative investment professionals who pass its examination process of two four-hour exams that focus on issues such as risk management, due diligence and fund administration.

The SEC explained that its examiners were highly trained in banks but lacked experience in examining hedge funds, Asche said.

"The SEC's role is to protect the end user, and part of that is recognizing in advance when a problem is developing," said Asche.