Hedge Lobby Snaps Back at Mutual Fund Group

The head of the main lobbying group for the hedge fund industry has essentially told his mutual fund counterpart to mind his own business following the latter's speech that "predatory trading strategies" by hedge funds have victimized mutual fund investors.

The spat between lobbyists underscores the degree to which increased Securities and Exchange Commission scrutiny is affecting both the $7 trillion mutual fund industry, which has seen its reputation take a pounding since the revelation of late-trading and market-timing abuses last fall, and the trillion-dollar hedge fund industry, which wants to ward off increased regulation by the government watchdog.

Jack Gaine, president of the Managed Funds Association, the main hedge fund lobbying group, said he was disappointed by remarks made Tuesday by Paul Schott Stevens, the new president of the Investment Company Institute. He took particular issue with a comment that hedge funds used market-timing strategies "to pick the pockets of long-term mutual fund investors."

"We recognize the daunting magnitude of the undertaking Mr. Stevens mustbe facing so early in his tenure and understand his desire to assign responsibility for the significant and pervasive misconduct in the mutual fund industry," Gaine said. "We believe the ICI could better serve and protect the 95 million U.S. investors who own mutual funds today by focusing on the structural reforms necessary in the mutual fund industry to ensure that recent misconduct is prevented going forward."

Hedge fund insiders have long blamed the mutual fund industry for the SEC's recent rumblings about stepping up regulation, noting that former Chairman Harvey Pitt began an exploratory investigation of hedge funds in 2002, not long after former ICI head Matthew Fink singled out the largely unregulated funds as a source of concern.

But because they are generally closed to all but institutional investors and the very wealthy, hedge funds aren't subject to the same oversight as mutual funds -- and the MFA wants to keep it that way. At a conference earlier this week, hedge fund manager James Chanos said his industry's rapid growth has encouraged the wandering eyes of government bureaucracy. "They believe that because there's $1 trillion invested out there, there must be something to regulate," he said.

John Collins, an ICI spokesman, said Thursday that his group would not respond to Gaine's barb, except to say that ICI's Stevens supports regulation and supervision of "mutual funds, selling intermediaries and hedge funds alike."

"He's not defending bad behavior on the part of mutual fund personnel," Collins said of the findings by New York State Attorney General Eliot Spitzer and other regulators that many fund companies were complicit in trading misconduct. "I think Mr. Spitzer's information indicated ... that the mutual fund scandal involved trading abuses by an organization called Canary Capital Partners, and as I recall, that falls into category of hedge fund."

The SEC has issued a host of new rules for mutual funds since the market-timing scandal was revealed, and Stevens said the ICI supported those reforms, as well as proposed regulation of hedge funds.

"We all recognize that -- first and foremost -- this is a mutual fund scandal," he said. "But the scandal is not limited to mutual funds. Enforcement actions and regulatory reforms at the SEC are addressing mutual fund issues comprehensively and forcefully, but the record developed since last September makes it clear that more is needed if we are to successfully prevent future abuses."

But Gaine and the MFA have stepped up their efforts to deflect regulatory attention from hedge funds, insisting the industry can regulate its own affairs without outside assistance.

"We support the efforts by Chairman Donaldson and his fellow commissioners to implement long overdue reforms in the mutual fund industry, which are designed to realign the interests of mutual fund companies with their investors."

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