Looking inside hedge funds

Amy Scott Jun 23, 2006

KAI RYSSDAL: They’re called hedge funds for a reason. Investors protecting themselves against an inopportune turn in the markets. Hedging their bets it’ll go down. Or up, for that matter. The funds themselves, though, can be a gamble. And there are reports one of the biggest is getting a close look see by federal regulators.

Pequot Capital Management is a $7 billion hedge fund. The New York Times said today Pequot’s under investigation for insider trading. No charges yet. And the fund denies doing anything untoward.

The SEC has been trying to increase its oversight of hedge funds. Despite all the money in them, they’re still pretty loosely regulated. Today a federal appeals court said not so fast. Threw out the SEC’s newest rule. Marketplace’s Amy Scott has that story.

AMY SCOTT: The rule kicked in just four months ago. It required hedge fund managers to register as investment advisers with the SEC and submit to occasional audits. University of Pennsylvania law professor David Skeel says today’s ruling sent the SEC back to square one.

DAVID SKEEL:“This was a major SEC initiative. It was the first real attempt to try to reign in hedge funds a bit. And it’s failed as of this point. And I think it’s going to be difficult for the SEC to get back on track.”

The agency could appeal. But a statement from Chairman Christopher Cox today suggests it may not. Cox says the decision requires the agency to reevaluate its approach to hedge funds. The court called the rule “arbitrary,” and said the agency had failed to make the case for its necessity. Hedge fund manager Phillip Goldstein brought the lawsuit against the SEC. He says the benefits of registration don’t justify the costs. Goldstein says consider a fund called International Management Associates. It shut down early this year when its manager disappeared.

PHILLIP GOLDSTEIN:“They had registered. They had registered fairly recently before they got caught, you know, and then by the way, they didn’t get caught by the SEC. They got caught by the investors.”

Even without the rule, attorney Michael Tannenbaum expects most hedge fund managers to keep registering.

MICHAEL TANNENBAUM:“We had a client wrote to me this morning saying ‘I heard about this new registration stuff. It really doesn’t effect us because we sell into Japan. And the Japanese market almost insists that the manager be registered.'”

Tannenbaum says there’s so much retirement money now invested in hedge funds, the market is asking for more transparency.

In New York, I’m Amy Scott for Marketplace.

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