The Hedge Fund Report: Another Way to Bet With Pros

The fraud unit will be small, with a $250,000 annual budget and two employees. State Rep. John Stripp, the sponsor, says that he backed away from his original bill because hedge funds had explained to him that "disclosure would create a lot of problems. There would be issues around proprietary information and the risk of copycats creating disruptions in the market." What else is new?

On the subject of secrets, Phil Goldstein, the hedge fund activist who bravely sued the Securities and Exchange Commission last year over its requirement that funds be registered, is getting ready for another battle. Goldstein is targeting 13Fs, the SEC filing that requires managers of larger hedge funds to disclose their holdings.

"That [13F] information is confidential," Goldstein says. "It's a trade secret. Like the formula of Coca-Cola." Some people view Goldstein as an eccentric. No one else has challenged the agency on the registration rule. But some have begun to take his SEC lawsuit more seriously after a U.S. appeals court judge appeared to side with him. A decision is still pending.

Carried Back

One recurring theme among hedge funds is the unwinding of the yen carry trade. Hedge funds used to borrow yen at an interest rate near zero, exchange it for dollars and invest the proceeds in higher-yielding assets such as U.S. Treasuries, commodities or emerging markets. But with Japan taking steps to tighten its monetary policy, the cost of borrowing in Japan is no longer nothing, and hedge funds can't go on playing the same game.

The attractiveness of the trade diminishes dramatically," says one fund manager. "People unwind the trade. They liquidate portions of their portfolio. It could create a cascading effect on a lot of hedge funds."

Recent weakness in some emerging markets and commodities is already being attributed to the phenomenon.