The Hedge Fund Report: Another One for the Masses

What is exactly the impact of this rule? It all depends on how many managers there are in the marketplace. That number is hard to compute, because database providers track the number of funds, not fund advisers. In general, the average firm operates two to three funds, and that implies there are around 3,500 to 4,000 management firms, says a database expert. Two years ago, the SEC predicted that 700 to 1,100 managers would register as a result of the new rule. With 962 new registrants, the agency is right on target.

With a little more than 2,000 advisers now registered, we are talking about a 55%-60% rate of registration. Not bad.

The SEC rule definitely has a broad impact. But it remains to be seen whether the commission will reach its goal to deter fraud. The rule also has loopholes, and while some have already taken advantage of them, others predict that corrections will be made.

One well-publicized aspect of the ruling is that it allows some managers to escape registration, provided that they have a two-year lockup. As a result, some have speculated that the SEC would amend this exemption to make it harder to qualify. Still, the impact of the loophole has been exaggerated. Hedge funds that benefit from the two-year exemption make up only 15% of the total, according to conversations Plaze says he had with lawyers.

"To modify the exemption, we would have to conclude that the goal of the rulemaking was not accomplished," he says. Considering the relatively high number of hedge funds that have registered, "I don't know if there is any plan to do that," Plaze says.

Still, the SEC can always amend its rule as it sees fit. "The two-year exemption was not designed to be a loophole," Plaze says. "It was created to differentiate hedge funds from private equity funds."

But as everyone knows by now, the lines between those two worlds are getting blurry.

>To order reprints of this article, click here: Reprints