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Registration Cost Acceptable for Large Manager Suc

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NEW YORK (–Andor Capital Management registered with the Securities and Exchange Commission when it started up in 2001. And it was the very first hedge fund SEC examiners visited when they began a study approximately 18 months ago that this week resulted in a recommendation to require hedge funds to register.

For Andor, the experience has been positive, if costly. “It was a pretty easy decision for Andor, predicated on our desire to build an institution,” said Jolyne Caruso, president of the firm. “The most important factor for us was that we were already a large firm.”

Andor was big at inception–with more than US$7 billion in assets that founder Dan Benton took with him when he left Pequot Capital. It has grown since to more than US$9 billion with offices in the United States, Europe and Asia Previous HedgeWorld Story Previous HedgeWorld Story.

Not that everybody in the new firm agreed about registering–some were not happy about being subjected to scrutiny and surprise audits by regulators and having to generate the enormous amount of paper work required from registered investment advisers. Indeed, having SEC staff parked out on the premises for a couple of weeks last year might have caused some anxiety.

But the group wanted to grow beyond the eight funds it had at the beginning and gain institutional clients. Being an RIA is an important advantage in raising money from pensions and other institutions Previous HedgeWorld Story.

Ms. Caruso was speaking at a panel organized by 100 Women in Hedge Funds Oct. 1. That day happened to be the second anniversary of Andor’s official start. The firm now has eight people working on meeting regulatory requirements. A manager needs to have enough resources to afford this, she pointed out.

Level Playing Field

Compliance work can be contracted out to an outside attorney, and a manager that has a single fund and assets below a threshold probably would do that instead of building its internal compliance team as Andor has done. “But size is a consideration,” observed Ms. Caruso. “You have to make sure at all times you have your house in order.” Not something that comes cheap.

Ann Tadajweski, partner at law firm Akin Gump Strauss Hauer & Feld LLP, New York, explained that the initial act of registering is simple but the level of work to comply with regulations depends on the size of the fund. It will be very costly to outsource compliance for a firm with multiple products and many institutional products, added Stephen Vine, also partner at Akin Gump Strauss Hauer & Feld LLP.

In reply to questions at the 100 Women in Hedge Funds seminar, Mr. Vine said the initial cost for a simple fund with one strategy and a homogenous group of investors might be in the $25,000 range. That is just for putting a compliance system in place.

The cost per year after that could be less, but it depends on the issues to be dealt with and whether there are new initiatives from the SEC. For example, RIA procedures had to be modified recently to comply with new proxy voting rules.

Mr. Vine does not expect U.S.-based hedge funds to relocate to offshore jurisdictions if the registration proposal is implemented. But there very well could be consolidation in the industry, as smaller funds that do not have the people and money to meet RIA requirements go out of business.

Multi-billion dollar managers who are not registered should be able to bear the burden if they are required to do so. Ms. Caruso said that for Andor, this would level the playing field as its peers become subject to the same requirements. But managers with, say, less than US$500 million of assets might find it difficult to carry the legal compliance costs.

She expects that with regulation there will be a decline in the number of hedge funds. As a result, the industry might evolve to a structure more closely resembling the mutual fund sector, dominated by large companies.

Looking back, Ms. Caruso sees registering and meeting the ongoing regulatory demands as a positive factor for the business–it allowed the firm to grow and generated a culture of ethics and compliance with law.

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