A failed regulatory push by the Securities and Exchange Commission may leave a lasting impression on the hedge-fund industry, according to a Greenwich Associates survey to be released on Wednesday.
Hedge funds, which are investment pools meant for the ultra-wealthy, traditionally have been lightly regulated, and SEC efforts to increase oversight met with criticism from the hedge-fund industry and a federal appeals court. An SEC rule requiring hedge-fund advisors to register with the SEC and undergo routine inspections, which took effect in February, was rejected as “arbitrary” in June by the U.S. Court of Appeals for the D.C. Circuit. This month, the SEC announced it would not appeal the ruling.
While the SEC rule lasted barely five months, many of the hedge funds surveyed by Greenwich Associates said they plan to retain the staff they hired and continue following the practices and procedures they put into effect to comply with the requirement. About 27% of hedge-fund advisors said they will remain under SEC oversight even though it is no longer mandatory, while 20% of those surveyed said they will deregister. More than half said they aren’t sure what they will do.
“Flip-flopping” is a concern for some hedge-fund managers, says Karan Sampson, director of hedge funds at Greenwich Associates. She says that a big chunk of hedge funds are federally registered because their investors insist on it, and those hedge-fund managers think deregistering now would send the wrong message to those investors. For hedge funds seeking investments by pension funds and other institutional investors, SEC registration “is just one more check-off of a check list,” says Sampson.
Cost appears to be the main reason why some hedge-fund managers want to flee from the stricter SEC requirements. The survey found complying with the SEC rule has imposed considerable cost on the hedge-fund industry, boosting outlays for software and staffing by almost 15%, and imposing 25% to 30% increases in consulting and legal fees. Smaller hedge funds find those costs harder to bear and of those that plan to deregister, the survey found three-quarters manage no more than $1 billion of assets. On average, the hedge funds that participated in the survey managed $2.9 billion of assets.
Most of the hedge funds that took part in the survey are U.S.-based and SEC-registered, according to Connecticut-based Greenwich Associates. The survey queried 47 hedge funds in the U.S., Canada, Britain and Europe between mid-July and early August, before the SEC said it wouldn’t appeal the court decision. Sampson says that the group doesn’t plan to revisit the issue now that the SEC has abandoned any appeal of the ruling.
Prospects that states may step in to fill the void at the federal level haven’t rattled hedge-fund managers, the survey also found. Although many rate state regulation as strict, fully 85% of those questioned said they don’t anticipate supporting industry groups that gear up to influence state policy on hedge funds. “It seems as if the hedge funds are still trying to stay below the radar,” says Sampson, and avoid lobbying, including at the state level.