March 25, 2011 - Hedge Funds are About to Undress
Featured Trades: (US HEDGE FUNDS ARE ABOUT TO UNDRESS)
2) Hedge Funds are About to Undress. The July 21 deadline for the hedge funds to register required by the one year anniversary of the Dodd-Frank bill is fast approaching, and the industry is roiling with turmoil. The net result for the rest of us could be shrinking market liquidity and falling asset prices as hundreds of funds shut down or move overseas rather than meet the new, onerous disclosure requirements and the vastly increased legal liabilities they imply.
The new regulations raise the level of disclosure virtually to the same level already demanded by your garden variety, plain vanilla mutual fund. Details will have to be released about assets under management, performance, strategy, risk management procedures, custody, brokerage relationships, soft dollar arrangements, commission discounts and kickbacks, fees, compensation of the managers, types of clients, conflicts of interest, and of course, their largest holding. All of this information must be provided in plain English, filed with the SEC, where it will be available online to the public.
The filings will provide a treasure trove of information about this most secretive corner of the financial markets. Commercial banks and mutual funds have long complained that hedge funds gained an unfair advantage hiding behind the curtains. Previous efforts to register the industry were thrown out of the federal courts, since they do not deal with the public. It took a massive lobbying effort in Washington to bring them to heal once again.
Hedge fund managers feel they are getting a raw deal. They were virtually the only class of financial institution that did not need a government bailout during the financial crisis. The cost of compliance will run many millions of dollars per fund. Even the slightest error in the filings, such as a 0.1% error in performance claims, could open them up to claims of securities fraud. Publication of holdings will allow competitors to game the market against them. The compensation information will provide a ripe target for divorce lawyers and other civil litigants. Frivolous law suits will soar. Kidnappers have also been provided a handy shopping list.
The are few exemptions left. Venture capital funds and family offices need not register. Nor do foreign based hedge funds with 15 or less US clients, less that $25 million in assets raised in the US, and no American based offices.
The largest funds, like Bridgewater ($58.9 billion), JP Morgan $45.5 billion), and Paulsen & Co. ($36 billion) will no doubt register, as they are too big to move and the incremental cost is small. It's another story for small funds, which may decide to move to foreign centers like Geneva or Singapore rather than undress in public. The net result could be a flight of capital from the US markets and falling prices, as the deadline coincides with the seasonal summer lull.
US Hedge Funds Are About to Disrobe in Public