Hedge Funds and PR: Getting Serious - and Fast

Hedge funds are under siege - this is nothing new. But what is new is the magnitude and breadth of criticisms being levied against the industry, and at a time when returns and reputations are at a cyclical low. Here is a sampling of the issues being raised by both the SEC and Congress, from Reuters 9/26/2007:

GREENWICH, Connecticut (Reuters) - The U.S. Securities and Exchange
Commission is conducting more than 30 investigations into potential
hedge fund manager misconduct in the northeast United States alone,
with more in other parts of the country, officials said on Wednesday.   

The investigations into potential insider trading, faulty asset
valuation, conflicts of interest and other misdeeds are under way
despite the agency’s setback last year when a federal court struck down
a rule requiring the lightly regulated hedge funds to register as
investment advisers.

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Connecticut Attorney General Richard Blumenthal, an outspoken
advocate on the need for more industry regulation, said the probes are
likely to bear fruit in states like his, home to scores of
multibillion-dollar hedge funds.   

“There are indications that the investigations will be very productive,” Blumenthal said in a keynote speech at the event.

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The SEC has made prosecuting insider trading at hedge funds a major
priority this year, including probing ties between the funds and
financial institutions that serve them in prime brokerage divisions,
said Karpati, who heads an intra-agency working group set up six months
ago with about two dozen executives.   

Agency officials said they haven’t been deterred by the setback it
suffered when a federal court struck down the rule that would have
subjected the industry to such measures as spot financial audits,
compliance manuals and increased disclosure.

Insider trading. Asset valuation. Conflicts of interest. These are not good things. And while hedge fund managers certainly weren’t the most popular kids on the block (from a regulatory standpoint) during the industry’s boom over the past five years, they may well be among the most detested right now. And this hasn’t gone completely unnoticed by some of the industry’s leading figures, including Paul Marshall of Marshall Wace. From FT Alphaville 9/25/2007:

Hedge funds - the bad boys of finance. Or is that private equity? We
lose track of who is finance’s enemy number one from one month to the
next. But not so long ago the funds were deeply unpopular - accused of
stalking the markets, creating volatility, aggressively targeting
respected UK companies through short-selling and looking for decent,
hard-working public company executives to unseat.

Then private equity got a touch carried away in the FTSE 100 and the
buyout groups found themselves being picked over by the unions,
parliament and the media. Now the credit markets have closed for
business and it’s Northern Rock, the Bank of England, the FSA and the
government in the dock for financial mismanagement and endangering the
system.

So should hedge funds, and private equity, skulk away thankfully as the fickle public spotlight has found itself another target?

No, argues Paul Marshall,
chairman of Marshall Wace and a member of the UK’s hedge fund working
group, in an FT comment article. Hedge funds may not be at the centre
of the current storm he says, but there is a web of linkages between
the banks and hedge funds. “Plus the the similarity of issues facing
banks and hedge funds, particularly in relation to valuation and risk
management, demonstrates how integral hedge funds have become to the
workings of the financial system.”

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Marshall adds that calls for more regulation, in France, Germany and
the US should provide an adequate stick for hedge funds to further the
process started by the working group under Sir Andrew Large. “The hedge fund industry must be seen to be taking its responsibilities  seriously. If not, others will fill the vacuum.”

I think Paul is spot on. The hedge fund industry needs to be proactive and help shape the dialogue concerning regulation, or else it will lose control and potentially be subject to illogical and politically-motivated rules and policies. One factor working against this adverse outcome is the working group assembled by Hank Paulson that is drawing up a set of hedge fund “best practices,” chaired by Russell Read of CalPERS and Eric Mindich of Eton Park. From the Financial Times 9/26/2007:

The appointments, by the president’s working group on financial
markets, are part of efforts by Hank Paulson, Treasury secretary, to
formulate a private sector-led response to concerns about the
activities of hedge funds and avoid potentially draconian regulations.

Russell
Read, chief investment officer of Calpers, regarded as one of the most
influential jobs in US capital markets, will chair a committee of
investors, while Eric Mindich, the chief executive officer of hedge
fund Eton Park, will chair an asset managers’ committee.

The
investors committee will include representatives from labour
organisations, endowments, foundations, corporate and public pension
funds and investment consultants.

Other members of the committees
will include Daniel Och, head of Och Ziff Capital Management, William
von Mueffling, the former star Lazard hedge fund manager who now runs Cantillon Capital, and James Chanos of Kynikos Associates.

These are smart, cerebral, experienced industry leaders that can bring different perspectives and reason to the proceedings. I have long pushed for private sector-led, self-regulatory solutions governing hedge fund practices. And the time is now for a proactive, industry-driven effort to ensure rational and helpful guidelines are set without regard to the media circus currently engulfing the private equity and hedge fund industries.

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COMMENT:

AUTHOR: Byrne

EMAIL: sometimesfunnyalwaysright@gmail.com

URL: http://byrneseyeview.com

DATE: 09/28/2007 12:03:50 PM

It’s fine if it’s tiered — if you can get the Hedge Fund Self-Regulatory Group Seal of Regulatory Fitness, but you can also not.

And I don’t see the need for additional regulation, when the problem is that they’re violating existing laws. We need a new law that makes it illegal for hedge funds to trade on inside information? Or to lie about their asset values? Really?

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