One Man’s Battle Against SEC Hedge Fund Regulation

Those funds that are already registered and have gone through a couple of SEC audits don’t seem to have much of a problem with it.  A lot of other funds under pressure to register seem to consider this a witch hunt and have duly introduced the 2 year hard lock-ups required to avoid registering. 

Practically speaking it is broadly held that the SEC does not have enough qualified personnel to deal with the registration process, let alone the monitoring....

As someone who’s in the process of starting a fund, though, I have to say it’s just another obstacle to getting a new business off the ground. It’s hard enough as it is!

The SEC rules are a boon for big, established hedge funds.  We have the infrastructure to comply with the SEC rules and the asset-base across which to spread the cost without unduly vitiating profitability.  In addition, some funds have used the SEC exemption (2-year lock-up) as, in my view, a convenient excuse to impose longer lock-ups that would otherwise antagonize investors.  “Hey, we really hate to do this to you, but we need to lock you up for 2-years on new contributions because otherwise we’ll have to register; and registration will be time-consuming, expensive and will distract us from making money for you.”

...An ironic result from the actions of the supposedly pro-investor SEC!

What’s worse is the recent trend by the large established hedge funds of introducing side-pockets… an even more convenient way of salting investors money away in opaque ‘special’ investments which may not be realisable for 5 years or more…

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As a “small” hedge fund manager right around the $30 million threshold to register, I say it will offer NO protection to my investors (on average, it takes the SEC 3 years(!) to audit a new RIA) but it will cost them in fees.  I have upped my management fee for new investors from 1.5% to 2% to cover the higher costs of the forthcoming registration.