RYE, N.Y. (HedgeWorld.com)--Industry participants and observers expect that there will be many U.S.-based hedge fund managers who will take advantage of the exemption from the Securities and Exchange Commission's new registration mandate available to firms with lock-ups of two or more years.
This development is likely to accelerate a trend already in existence. Two years ago, Simon Thomas, partner in the law firm Akin Gump Strauss Hauer Feld LLP, London, noted a lengthening of lock-up periods. Historically, he said, the period had been one year, but by mid-2002, several managers had begun offering a reduction in the performance fee (from 20% to 17%, for example) in return for a lock-up of up to three years.
Robert Schulman, co-chief executive of Tremont Capital Management Inc.,* Rye, N.Y., said that Tremont, a registered investment adviser, has a number of fund of funds products under development with lock-ups of longer than one year.
He said that this wasn't a matter of avoiding registration--"we are registered, it's not our desire to have an unregistered product"--but of tapping into the growing sub-sector of the market for underlying funds with longer lock-ups.
Asked whether the number of such underlying funds can be expected to increase in the near future, Mr. Schulman said "you can take that to the bank."
Recently, Tremont's founder, Sandra Manzke, told an online publication that certain strategies, such as special opportunities, rely on deals that can take some time to achieve profit and that this fact drives managers in those fields to institute longer lock-ups. She named Eton Park Capital Management LP, New York; Maverick Capital Ltd., Dallas; and Spinnaker Capital Group, Sao Paulo, Brazil, as among notable hedge funds that employ longer lock-ups.
Although Maverick does allow investors to redeem quarterly, for some of its products redemption fees discourage the option. That would not exclude these products from the registration requirement under 203(b)(3)-1.
Eton Park wouldn't comment on the issue.
On Oct. 26, 2004, when the SEC was voting on the registration rule, Commissioner Paul Atkins spoke to the issue of the lockout time. He said that the two-year rule, intended as a way to distinguish between hedge funds and private equity funds, doesn't represent any legitimate regulatory distinction.
"If our rule accelerates a trend toward longer lock-up periods ... our rule will have actually harmed investors," he warned, "who will now have less freedom to vote with their feet by pulling their money out of a hedge fund that is mismanaged."
*Tremont Capital Management Inc., Rye, N.Y., is a strategic partner of and a minority investor in HedgeWorld.
Contact Bob Keane with questions or comments at: firstname.lastname@example.org.