Issue #40
Last Update August 3, 2005
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Finance Hedge Funds by David Katz The Managed Funds Association, an industry group of Hedge Fund managers and trading advisors, held its Network 2003 meeting early this month in Miami Beach. This meeting provided an opportunity for members of this industry to share information about trends and opportunities in the field. It also provided a window for the general public to view developments in this little-publicized investment area.
Hedge funds are little known to the general public, since they are not sold to the ordinary investor. Unregulated by the SEC or any other government agency, a hedge fund is a private investment limited partnership, having fewer than 100 qualified investors who all are high net worth individuals and experienced investors. (Under certain circumstances, the number of investors may rise to 499, but their net worth requirements will be higher.) For hedge fund purposes, high net worth is generally taken to mean a net worth exceeding $1,000,000, or ongoing income of over $200,000 per year. A corporation, trust, foundation or partnership may qualify as a high net worth investor if it has assets of over $5,000,000. Despite the name, hedging is not a required activity of such a fund. Some hedge funds are known as a fund of funds; that is, instead of investing directly, the fund invests in other hedge funds.
Hedge funds last came to the attention of the general public in 1987, when Long Term Capital Management, an extremely large hedge fund, failed in an adverse market due to a combination of heavy leverage and a hedging technique that failed to reduce the market risk. The huge numbers involved, and the supposed sophistication of the investors who lost heavily generated headlines for weeks.
Several developments have brought hedge funds back into view. One is the push toward greater transparency that is beginning to open the normally secretive hedge fund world. A second is the Patriot Act, whose anti money laundering provision is forcing this unregulated investment vehicle to be more inquisitive as to the identity of investors and the source of their funds. (See Patriot Act in the current New York Stringer issue) The third development is the trend toward regulated hedge funds, which would allow a less select group of investors to make use of this vehicle.
The drive for greater transparency is being driven by investors, especially institutional investors and asset allocators, who want to be able to evaluate risk more accurately and on a more timely basis. To further this end, they are demanding more detailed information from fund managers as to strategies and asset class activity.
Pressure for the creation of regulated hedge funds comes from the hedge fund industry itself. Regulated hedge funds would enlarge the pool of possible investors by eliminating or reducing the eligibility threshold, enlarging the potential size of a given fund, and allowing the funds to solicit and advertise for investors. By taking the hedge fund out of the category of an investment vehicle for the super-rich and sophisticated investor and making it available to individual retirement plans and ordinary investors, the funds will have to assume the burdens of SEC scrutiny, heightened disclosure and transparency, leverage and borrowing restrictions, and future regulatory restrictions.
New York Stringer is published by NYStringer.com. For all communications, contact David Katz, Editor and Publisher, at david@nystringer.com
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