March 31, 2003

Roye Speaks of Hedge Fund Fraud in Speech to ICI

ORLANDO, Fla. (HedgeWorld.com)--The director of investment management at the Securities and Exchange Commission addressed a conference of the Investment Company Institute Monday, and promised its members that the SEC will continue to be vigilant in the investigation of hedge fund fraud.

Although most of his speech addressed other matters--especially the changes in the fund-management world produced by the Sept. 11 terrorist attack on the United States and the many lessons to be learned from the Enron situation--in mid-stream Paul Roye did turn briefly to hedge funds.

"To a certain extent, questions about trust and confidence are evident in the hedge fund arena. In recent years, as hedge fund assets have grown, we also have seen an unfortunate growth in hedge fund-related fraud. The Commission has had to bring far too many hedge fund fraud cases in circumstances where the losses to investors have been substantial. The Commission and its staff are actively monitoring hedge fund developments and will continue to be vigilant in identifying cases of hedge fund fraud." It might have seemed a digression, but the words had an attention-getting ring to them.

"We support the SEC and Mr. Roye in any of his efforts to combat fraud--the remarkable growth of the hedge fund industry reflects judgments by sophisticated investors of the need for alternative investments," said John G. Gaine, president of the Managed Funds Association, responding on behalf of the hedge fund industry Wednesday afternoon.

Mr. Roye expressed his skepticism about hedge funds in a more elaborate way in July 2001, at a conference of pension fund managers, when he urged the attendees to avoid investing in hedge funds (Previous HedgeWorld Story).

But his comments Monday must have been welcome to the ears of his audience--the ICI is the chief trade group representing mutual funds, and its members often regard the very existence of hedge funds as a threat to their interests.

"The ICI is very interested in requiring that all pooled investments take place through an investment company," said Mr. Gaine, but sophisticated investors continue "voting with their feet to say that the mutual fund format is not the answer for all investors."

CFaille@HedgeWorld.com

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