from wallstreet journal 11-10-2005
A large number of major hedge-fund firms won't be registering with the
Securities and Exchange Commission despite new rules aimed at forcing
most hedge-fund advisers to sign up by early next year.
These firms have adopted measures to take advantage of a loophole
provided by the agency -- potentially undercutting the SEC's efforts
to uncover fraud and get a better understanding of the growing
business.
The firms include SAC Capital Management LLC, Kingdon Capital
Management LLC, Citadel Investment Group PLC, Eton Park Capital
Management LLP, Lone Pine Capital and Greenlight Capital.
Like other hedge funds, these private partnerships manage large pools
of capital for wealthy individuals and institutions, but they are
larger than most, managing billions of dollars each, and pursue
cutting-edge strategies that can have an impact on specific securities
and overall markets.
Representatives of the firms wouldn't comment or weren't available.
(Meanwhile, the SEC sued a $43 million hedge fund, Groundswell
Partners LLC, over allegedly hidden losses. See article.)
Last year, SEC commissioners voted to make hedge funds managing more
than $25 million register with the SEC, requiring them to submit to
periodic audits and provide detailed information about their trading,
among other steps. SEC Chairman Christopher Cox recently signaled that
the changes will go into effect, as planned, in February. A recent
spurt of alleged fraud at hedge-fund firms such as Bayou Management,
Wood River Capital Partners and KL Financial Group has added to calls
for more oversight.
But the SEC's rule only applies to advisors that permit investors to
redeem their interests in a hedge fund within two years of purchasing
their stakes. The agency concluded that the average "lockup" period
for hedge funds is 12 months, so the 12-month period is the time frame
covered by the rule.
"We're aware that some hedge-fund advisers are planning to extend
their lockup period and we'll evaluate the situation when we have a
better picture of the situation in February," said Robert Plaze,
associate director of the SEC's investment-management division.
However, the SEC's registration rule proved quite contentious, even
within the agency, so in the near term it may be difficult for the SEC
to adjust the rules to capture the lockup extenders.
Some of the largest firms, like SAC, with $6.5 billion under
management, and Kingdon, are in the process of instituting longer-term
lockups. Others, such as Lone Pine, which manages $6.9 billion, aren't
open to new investors and don't need to register. Citadel, a $12
billion firm, and Eton Park, which manages $3 billion, have always
featured long-term lockups for the bulk of their money, so the SEC's
rules don't apply.
Some of these funds say they are wary of registration because they
fear an SEC audit will tie up traders and senior management for weeks,
and they worry that SEC examiners won't fully understand their trading
strategies, which can be complex. Others say they expect the SEC to be
aggressive in its oversight in the early months of the registration
process, to demonstrate that it is serious about tracking down
problems. Still others are wary of the cost of complying with the
SEC's registration requirement, which could cost more than $500,000
for many funds.
Kingdon, a $4.6 billion hedge fund in New York that will impose a
two-year lockup in February and avoid registration, has told its
investors that even though the firm meets the SEC's registration
requirements for almost all aspects of its operations, the firm won't
register.
"SEC registered advisors will face a time-consuming SEC audit process
and an onerous email retention requirement," the 22-year old firm told
investors in a September letter explaining its decision. "The
additional administrative burden of SEC registration may result in a
distraction to senior management with no discernible benefit to our
investors. Accordingly, we have decided not to register with the SEC
at this time."
New York-based hedge fund manager Atticus Capital LLC has informed its
investors that it will stop accepting new money on Jan. 1 and won't be
registering with the SEC, according to a person familiar with the
firm. Atticus, which manages more than $7 billion, has also told
investors that if it accepted new investments in the future, its
current plan would be to launch a new class of shares that had
two-year lockups or other parameter that would exclude the firm from
registration requirements.
Two-year lockups also allow firms to capture client assets for a
longer stretch of time.
"We have seen a rise in the number of firms asking for two-year
lockups and the driver of that is probably the SEC requirements," says
Thomas Schneeweis, director of the Center for International Securities
and Derivatives Markets at the University of Massachusetts. "If you
can pull it off, let's face it, you'd do it."
So far, the anticipated flood of new registered investment advisers
has yet to materialize. An estimated 5,000 or so of the approximately
8,000 existing hedge funds aren't yet registered. So far this year,
however, new registrations average about 100 a month, according to SEC
data, not much more than last year's 80-a-month pace.
"There have been many attorneys and people like me out there with
bullhorns talking about registration," says Emmett Ryan, director of
hedge-fund services at New York compliance consultant Buchanan
Associates. "We haven't quite seen quite the response we expected."
A firm's registration typically isn't official until 45 days after its
application is filed, according to SEC rules. So, firms have a Dec. 15
deadline if they wanted to be registered by Feb. 1. Funds that need to
comply and don't comply could face fines or other penalties.
Just as many taxpayers put their returns in the mail at the last
minute, a pickup in registration applications could take place in the
next month or so.
Funds remain subject to securities laws that apply to the entire
marketplace, and most are registered with the Commodity Futures
Trading Commission.
Some hedge-fund investors say they aren't overly concerned by the rash
of funds avoiding registration.
"Just avoiding registration because the manager prefers to avoid the
hassle has to be looked at less favorably," says Charles McNally, a
managing director at Lyster Watson & Co., which allocates money to
hedge funds on behalf of wealthy families and institutional investors.
But he says that he wouldn't be concerned about some funds that avoid
registration because they are locking up their capital for a longer
term, if it helps their investment strategy
A large number of major hedge-fund firms won't be registering with the
Securities and Exchange Commission despite new rules aimed at forcing
most hedge-fund advisers to sign up by early next year.
These firms have adopted measures to take advantage of a loophole
provided by the agency -- potentially undercutting the SEC's efforts
to uncover fraud and get a better understanding of the growing
business.
The firms include SAC Capital Management LLC, Kingdon Capital
Management LLC, Citadel Investment Group PLC, Eton Park Capital
Management LLP, Lone Pine Capital and Greenlight Capital.
Like other hedge funds, these private partnerships manage large pools
of capital for wealthy individuals and institutions, but they are
larger than most, managing billions of dollars each, and pursue
cutting-edge strategies that can have an impact on specific securities
and overall markets.
Representatives of the firms wouldn't comment or weren't available.
(Meanwhile, the SEC sued a $43 million hedge fund, Groundswell
Partners LLC, over allegedly hidden losses. See article.)
Last year, SEC commissioners voted to make hedge funds managing more
than $25 million register with the SEC, requiring them to submit to
periodic audits and provide detailed information about their trading,
among other steps. SEC Chairman Christopher Cox recently signaled that
the changes will go into effect, as planned, in February. A recent
spurt of alleged fraud at hedge-fund firms such as Bayou Management,
Wood River Capital Partners and KL Financial Group has added to calls
for more oversight.
But the SEC's rule only applies to advisors that permit investors to
redeem their interests in a hedge fund within two years of purchasing
their stakes. The agency concluded that the average "lockup" period
for hedge funds is 12 months, so the 12-month period is the time frame
covered by the rule.
"We're aware that some hedge-fund advisers are planning to extend
their lockup period and we'll evaluate the situation when we have a
better picture of the situation in February," said Robert Plaze,
associate director of the SEC's investment-management division.
However, the SEC's registration rule proved quite contentious, even
within the agency, so in the near term it may be difficult for the SEC
to adjust the rules to capture the lockup extenders.
Some of the largest firms, like SAC, with $6.5 billion under
management, and Kingdon, are in the process of instituting longer-term
lockups. Others, such as Lone Pine, which manages $6.9 billion, aren't
open to new investors and don't need to register. Citadel, a $12
billion firm, and Eton Park, which manages $3 billion, have always
featured long-term lockups for the bulk of their money, so the SEC's
rules don't apply.
Some of these funds say they are wary of registration because they
fear an SEC audit will tie up traders and senior management for weeks,
and they worry that SEC examiners won't fully understand their trading
strategies, which can be complex. Others say they expect the SEC to be
aggressive in its oversight in the early months of the registration
process, to demonstrate that it is serious about tracking down
problems. Still others are wary of the cost of complying with the
SEC's registration requirement, which could cost more than $500,000
for many funds.
Kingdon, a $4.6 billion hedge fund in New York that will impose a
two-year lockup in February and avoid registration, has told its
investors that even though the firm meets the SEC's registration
requirements for almost all aspects of its operations, the firm won't
register.
"SEC registered advisors will face a time-consuming SEC audit process
and an onerous email retention requirement," the 22-year old firm told
investors in a September letter explaining its decision. "The
additional administrative burden of SEC registration may result in a
distraction to senior management with no discernible benefit to our
investors. Accordingly, we have decided not to register with the SEC
at this time."
New York-based hedge fund manager Atticus Capital LLC has informed its
investors that it will stop accepting new money on Jan. 1 and won't be
registering with the SEC, according to a person familiar with the
firm. Atticus, which manages more than $7 billion, has also told
investors that if it accepted new investments in the future, its
current plan would be to launch a new class of shares that had
two-year lockups or other parameter that would exclude the firm from
registration requirements.
Two-year lockups also allow firms to capture client assets for a
longer stretch of time.
"We have seen a rise in the number of firms asking for two-year
lockups and the driver of that is probably the SEC requirements," says
Thomas Schneeweis, director of the Center for International Securities
and Derivatives Markets at the University of Massachusetts. "If you
can pull it off, let's face it, you'd do it."
So far, the anticipated flood of new registered investment advisers
has yet to materialize. An estimated 5,000 or so of the approximately
8,000 existing hedge funds aren't yet registered. So far this year,
however, new registrations average about 100 a month, according to SEC
data, not much more than last year's 80-a-month pace.
"There have been many attorneys and people like me out there with
bullhorns talking about registration," says Emmett Ryan, director of
hedge-fund services at New York compliance consultant Buchanan
Associates. "We haven't quite seen quite the response we expected."
A firm's registration typically isn't official until 45 days after its
application is filed, according to SEC rules. So, firms have a Dec. 15
deadline if they wanted to be registered by Feb. 1. Funds that need to
comply and don't comply could face fines or other penalties.
Just as many taxpayers put their returns in the mail at the last
minute, a pickup in registration applications could take place in the
next month or so.
Funds remain subject to securities laws that apply to the entire
marketplace, and most are registered with the Commodity Futures
Trading Commission.
Some hedge-fund investors say they aren't overly concerned by the rash
of funds avoiding registration.
"Just avoiding registration because the manager prefers to avoid the
hassle has to be looked at less favorably," says Charles McNally, a
managing director at Lyster Watson & Co., which allocates money to
hedge funds on behalf of wealthy families and institutional investors.
But he says that he wouldn't be concerned about some funds that avoid
registration because they are locking up their capital for a longer
term, if it helps their investment strategy