The issue of hedge fund registration has been in the news ever since the rules were originally proposed by the SEC. Now we are seeing some evidence of the results of this regulatory push.
Kara Scannell in the Wall Street Journal reports that more than 500 hedge funds have successfully registered with the SEC with several hundred more still in process. Now the interesting work begins. Will hedge fund investors demand that their advisors register? Will the SEC be able to translate registration into a more robust oversight effort? Only time will tell.
Bill Sjostrom at Truth on the Market notes this same news and reviews the reasons why the SEC chose to regulate hedge fund managers in the first place. He also highlights what changes the rules will mean for advisors. He asks one seemingly obvious question that remains unanswered:
But if the SEC truly believes additional regulation is warranted and adviser registration is the right answer, why did they draft rules that appear to result in much less than half of hedge fund advisers registering?
Lawrence C. Strauss at Barron’s examines the many crosscurrents surrounding the issue of registration. Despite the fear that many firms would implement two year lock-ups it seems likely that only the largest and most sought after firms will be able to pull this off.
David Goldstein says that “investors want to know when they can get out. Except for the highest-quality hedge funds, investors in all other hedge funds are not sympathetic. They still want their redemption rights.” Thus, they’ll avoid funds with two-year lockups.
While not directly related to the issue of registration, Erin E. Arvedlund at Barron’s reports on one of the dirty little secrets of hedge funds – tax inefficiency. Hedge fund strategies are notoriously short-term in nature and generate returns taxed at the highest levels. In a world of reduced return expectations for hedge funds this issue will become ever more prominent.
Although the SEC registration process is well underway we are only beginning to see the fallout from the rule. As the hedge fund faces more competition and unfriendly capital markets it will be interesting to see how many smaller, and startup, hedge funds will be able to weather the storm.