A proposal under consideration by the California Corporations Comm-issioner that would require registration by hedge funds is having a hard time finding supporters.
The Commissioner’s proposal would mandate the registration of nearly every investment advisor doing business in the state. The sole exceptions would be those advisors that strictly limit themselves to providing investment advice to venture capital clients or entities. The proposal has drawn several comments since it was first promulgated. Not surprisingly, though, none of those comments favor it as it currently stands.
Many of the comments come from advisors who agree in principle that hedge funds should be required to register but who say, in effect, that their own operations are not hedge funds and so the proposal should be re-written to exclude them.
The first comment the Corporations Department received on this subject was precisely of that sort. Craig Ehlenberger, the principal of Abalone Cove Advisors, wrote, “I certainly recognize and share the concerns related to the unregulated hedge fund industry, and completely agree such entities require some kind of oversight to protect those who may unwittingly invest inappropriately in these funds.”
But Abalone Cove Advisors, he wrote, shouldn’t become enmeshed in that web, since his clients are primarily California counties and other cash management institutions that invest entirely within the fixed income/debt markets.
Fixed-Income and Family Offices Aren’t Hedge Funds
Most industry observers remember the high-profile embarrassment experienced by the treasurers of California’s 58 counties in 1994 after Orange County declared bankruptcy. For those who don’t recall, the Orange County debacle was the largest municipal bankruptcy in U.S. history. Ehlenberger’s comment references that incident and he writes that Orange County treasurer and tax collector Robert Citron’s unwise use of derivatives to place large bets on the county’s behalf was allowed by certain statutory “loopholes and issues” that the California legislature has since addressed.
Adding Department of Corporations supervision of his role advising treasurers on a monthly-fee basis just “does not make sense,” in Ehlenberger’s view.
Advisors who run family offices for their clients don’t seem to think that it makes much sense in their situations, either. A representative of one of these, Jen Luh, wrote, “Family offices are in no way similar to hedge fund managers. Our business is very transparent to our family owner/investors and we work closely with the family in every aspect of the business, which is very different than how hedge funds work.”
Another broad-based critique of the registration proposal came jointly from the Managed Funds Association and the Coalition of Private Investment Companies, which reasoned: “In sum, if the proposal is adopted, the [Corporations] Department will be required to assign staff, time, and resources to monitor advisors that cater to sophisticated investors who are demonstrably more than capable of defending their own interests, and take those resources away from protecting those investors who cannot be presumed to have the financial wherewithal or sophistication to protect themselves from fraudulent tactics or unscrupulous hucksters.”