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Senate Hearing Attempts to Find Regulatory Middle Ground

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NEW YORK (–Fund managers and a high-ranking public pension officer presented senators with differing views on how best to avoid the twin dangers of too much or too little regulation for the hedge fund industry.

Speaking before the U.S. Senate Committee on Banking, Housing and Urban Affairs, CalPERS Investment Chief Mark Anson defended the Securities and Exchange Commission’s proposal to require managers with more than US$20 million in assets to register as investment advisers.

He said there are two advantages to registration: having managers provide uniform information about themselves and getting data to determine the total size of the hedge fund industry. But there must be a balance, he added. “Burdensome regulation could have two adverse consequences,” said Mr. Anson.

Excessive regulation might reduce the returns earned by hedge fund managers by restricting their investment strategy. In addition, managers may move their funds offshore, thereby reducing investment opportunities for U.S. investors.

The California Public Employees’ Retirement System, with US$165 billion in total assets, has allocated US$1 billion to its hedge fund program. Of this, about US$750 million has been invested with 16 managers over the past two years and now has a market value of US$877 million, said Mr. Anson. Nine of the 16 managers are registered investment advisers.

Creaky Regulation

Adam Cooper, chairman of the Managed Funds Association in Washington and senior managing director and general counsel of Chicago-based bond arbitrage manager Citadel Investment Group, said the current legal framework works extremely well. MFA opposes the SEC proposal.

Mr. Cooper argued that issues raised by regulators could be addressed in other ways. One possibility would be raising asset standards for qualified investors to address the concern registration proponents have expressed that vulnerable small investors might come into hedge funds.

Short seller James Chanos, president of Kynikos Associates LP, in New York, advocated an alternative to the SEC proposal. Instead of mandatory registration, he suggests the SEC require fund managers to provide it with basic information and certify audited annual financial statements and unaudited quarterly reports, as well as certify that their funds meet minimum investor qualifications and comply with custody rules.

This approach “will reduce the risk of undue reliance by investors on SEC oversight, conserve important SEC resources and reduce the risk that registration will grow, over time, into a creaky and burdensome form of regulation that robs the capital markets of the innovations, insights, liquidity and efficiencies that the hedge fund industry currently brings,” according to Mr. Chanos.

The specter of increasingly being bound in red tape is a major reason many industry people oppose the SEC proposal. Mr. Cooper expressed the concern that “any changes to the current regulatory scheme must be carefully crafted to avoid duplication of regulation to which managers are already subject and other unnecessary burdens.”

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Contact Robert F. Keane with questions and comments at:

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