From the March 2009 issue of Investment Advisor • Subscribe!

HedgeWorld: And So It Begins

Now that the 111th Congress has been seated and the 44th President of the United States inaugurated, the first stirrings of hedge fund legislation and increased regulation have been sighted, with President Barack Obama, Treasury Secretary Timothy Geithner, and SEC Chairman Mary Schapiro all calling for more regulation of hedge funds.

On January 29, Senator Chuck Grassley (R-Iowa), with co-sponsor Carl Levin (D-Michigan) introduced S. 344, which was referred afterward to the Committee on Banking, Housing, and Urban Affairs.

The bill, known as the Hedge Fund Transparency Act, would amend the Investment Company Act of 1940 to require hedge funds to file annually and electronically with the SEC a statement with information including the primary broker and primary accountant, the minimum investment needed to get into the fund, the number of partners in the fund, and the total assets held by the fund. In addition to making this information available to the Commission, the bill would require that it be made available "to the public at no cost and in an electronic, searchable format."

While it is unclear whether this bill will ever see the light of legislative day, and while some increased regulation of such limited partnerships is likely, considering the tenor of the public and the expressed promises of the new President, what is clear is that this is a red herring of sorts.

Hedge Fund Research Inc. (HFRI), reported February 2 that some 55% of U.S. hedge funds are already registered with the SEC. Those firms, which manage 71% of all U.S.-based hedge fund capital, did so voluntarily. On a global basis, hedge funds already registered with the SEC, said HFRI, manage 60% of the $1.4 trillion in hedge-fund assets.

While there are indicators suggesting some hedge fund strategies may be turning around after their annus horribilis in 2008--HFRI said convertible arb funds rose 5.9% in January--that won't slow the push to regulate hedge funds.

In introducing his legislation, Levin said that "the problem is that hedge funds have gotten so big and are so entrenched in U.S. financial markets, that their actions can now significantly impact market prices, damage other market participants, and can even endanger the U.S. financial system and economy as a whole."

Getting a Conscience?

Those hedge fund investors who were able to redeem their investments were the lucky ones, it turned out. Many hedge funds still face a liquidity crunch, and some of their investors are still waiting for their cash, as even big funds like Citadel Investment Group and Farallon Capital Management halted redemptions after posting big losses last year. However, there are some hedge fund managers who, prompted by their poor performance and the pain faced by investors, are taking other steps. William Ackman, who runs Pershing Square Capital Management, sent a letter to his investors on February 8 apologizing for the 90% drop in the value of one of his funds, Pershing Square IV, which invested solely in Target Corp. stock, and said that he would allow those investors to withdraw the capital they had left in Pershing Square IV in March. Ackman said he was disappointed by the fund's "dreadful performance" and "apologized profusely for the fund's results to date."

Beyond his mea culpas, however, Ackerman said that for those same investors he would forego levying performance fees on the other hedge funds he manages until those funds (which were down 13% and 11% in 2008) made up for the losses investors suffered in Pershing Square IV. Ackman, 42, also said he would commit $25 million of his own money to help repay clients in the battered fund.--James J. Green

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