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April 16, 2003 at 08:00 PM
WASHINGTON (HedgeWorld.com)–The Senate Banking Committee heard from the chairman of the Securities and Exchange Commission Thursday morning, as he offered a progress report on the SEC’s ongoing examination of hedge fund policy.
Sen. Richard Shelby (R-Ala.), as chairman, opened the Banking Committee’s hearing with a brief summary of some of the issues at stake.
He began by stressing the relative secrecy in which hedge funds operate, even quoting Prime Minister Churchill’s words on Russia, “a riddle wrapped in a mystery inside an enigma.”
The Senator then noted that during recent years, which have been bearish for most U.S. equities, hedge funds have managed positive returns. Not surprisingly, this has made them attractive to qualified investors, enough so to attract a flight of capital from more traditional instruments. Furthermore, the high fees have attracted the best money managers–again at the expense of those more traditional sectors.
Sen. Shelby singled out funds of funds, which he called an “indirect retail market,” as a source of concern because retail investors might not receive sufficient disclosure about the nature of the investments they’re making. More generally, he said that the presence of mutual funds and hedge funds under the same institutional roof can create conflicts of interest and that some unscrupulous hedge funds could use “the opaqueness of the private placement to misuse or mismanage funds entrusted to them.”
Fact-Finding Issues
In his address to the committee, William H. Donaldson, the SEC chair, spoke to the same issues, while saying that the SEC is still in the fact-finding stage, having not yet reached any conclusions. On the subject of hedge fund secrecy, he observed that this trait is often crucial to a fund’s investment strategy. He used the example of a hedge fund taking a short position in a particular security–the fund clearly would not tell the world, or its own investors, of that position in real time.
As to retailization, Mr. Donaldson noted that the monetary amounts used to determine accredited investor status essentially have remained the same since 1982. With the growth in incomes and wealth, though, many more investors meet those standards, and “we could of course consider adjusting it, if appropriate.” But he added that the effects of any adjustment on small business capital formation would have to be considered before any such change is implemented.
