The main lobbying group for the $1 trillion hedge fund industry hopes to ward off increased regulation with a charm offensive and a long list of Washington players that oppose
Securities and Exchange Commission
Chairman William Donaldson's push for closer supervision over the last several months.
The Managed Funds Association, which represents about 750 of the estimated 6,800 hedge funds in the United States, believes that with
Chairman Alan Greenspan, House Financial Services Committee Chairman Michael Oxley, Commodity Futures Trading Commission head James Newsome and two of five SEC commissioners on its side over the issue of SEC regulation, the industry could avoid having fund managers register as investment advisers and be left alone to regulate itself.
"Self-policing is really the best solution," said Adam Cooper, MFA chairman and general counsel for Citadel Investment Group, one of the country's five largest hedge funds. He said the group would be increasing its education and outreach efforts with the news media and with lawmakers in Washington to promote its views. Because retail investors are largely uninvolved and hedge fund investors understand the risks of these sometime complex strategies, opponents of regulation say the current system works and should not be altered.
Hedge funds, which are loosely regulated pools of investment capital, are usually closed to retail investors and generally require a minimum investment of $1 million to $5 million. Because they are private investment partnerships, they are not subject to the same regulations as mutual funds and their managers. Many hedge fund managers claim this investment freedom allows them to pursue basic investment strategies and specific investment decisions with an advantage that would be lost under increased SEC scrutiny.
Since the start of the year,
Donaldson has been making public statements supporting an SEC staff report that recommended having fund managers register with the agency, but has run into opposition from hedge fund managers and fellow regulators. SEC spokesman John Nestor said the SEC is still considering the staff recommendation.
Cooper and Jack Gaine, the president of the trade group, said on Monday that the industry should take its cues from the sophisticated institutional investors that are requiring greater transparency and disclosure from managers, rather than submit to a new set of SEC regulations, which they claim will be of dubious benefit in reducing fraud and protecting retail investors -- the two concerns that spurred then-Chairman Harvey Pitt to begin investigating the industry in May 2002.
"I'd rather have Mark Anson
the chief investment officer of the California Public Employees Retirement System, the largest public pension fund in the country vet the hedge funds," Gaine said. "I don't see -- as George C. Wallace said -- what pointy-headed, briefcase-toting bureaucrats at the SEC could do for the investment side."
The wisdom of citing the former segregationist governor of Alabama aside, Gaine and the MFA may carry the day by default.
Donaldson has made regulation of hedge funds a centerpiece of the SEC's rehabilitation of its reputation after the mutual fund trading scandals of the past nine months, but two fellow Republican-appointed commissioners, Cynthia Glassman and Paul Atkins, have publicly opposed requiring hedge fund managers to register as investment advisers. Apart from Democratic appointed commissioners Harvey Goldschmid and Roel Campos, Gaine said Donaldson's opponents carry some weight.
"I like to be alongside Alan Greenspan on just about anything," Gaine said. He said Greenspan opposed regulating hedge funds in 1998, while serving on the Presidential Working Group to sort out the aftermath of the collapse and bailout of Long-Term Capital Management, an event that put hedge funds in the public eye. Gaine said Greenspan continued to oppose regulation in recent meetings with the MFA.
"He's said about registration that maybe you can live with it, but it's what it portends -- it's the nose of the camel getting under the tent," Gaine said. "His stance has been that you'll just drive them offshore, and then we'll know less about them than we do now."
The Senate Banking Committee, a key player in regulating the financial services and investment industry, has delayed hearings on hedge funds that were scheduled for the end of this month.
James Chanos, president and founder of Kynikos Associates, a short-selling investment group, told attendees of the conference that the industry's recent growth -- it now has an estimated at $1 trillion in assets under management -- has convinced some legislators that further regulation above and beyond the SEC's efforts is needed.
"They believe that if there's $1 trillion
in investments there must be something to regulate," he said. Congress is the one place we probably have the most to fear from. If there is going to be any problem, it is going to come off the Hill."