Hedge Funds Hiring...Former Regulators

The good news is that hedge funds are finally hiring again. The iffy news, depending on your perspective, is that they are hiring a number of former SEC officials. And they aren't hiring mid-level guys for their risk management experience. Hedge funds are hiring top-level former regulators, possibly revealing their concerns about greater hedge fund regulation, oversight, and taxation. Surely hedge fund manager John Paulson's recent decision to hire Harvey Pitt, a former SEC Chairman, as an outside director was intended to get him some lobbying clout. Earlier in 2010, hedge fund Millennium Management hired two former SEC Commissioners.

The recent hires of high-profile former regulators raises a host of questions. Is Capitol Hill prepared to take on the financial industry or are they waiting for that chance at a cushy job crusading for multi-billion dollar funds? Are hedge funds hiring these experienced regulators for their ability to guide the firm as new regulations are enacted or are they being hired for their ability to influence the outcome of regulations themselves? Should the SEC, as suggested by Senator Ted Kaufman (D-Delaware), ban senior officials from taking jobs at companies they recently oversaw?

Hedge Funds Quit Shortselling As Rule Change Looms

Is Fear of Short-Selling Bans Driving Hedge Funds to Limit Exposures?
Hedge funds have been reigning in their short-selling in anticipation of new rules on short-selling, according to the Wall Street Journal. Today, the SEC voted to restrict short-selling on stocks that have declined by more than 10% in a single day. Insiders also believe their will be a new uptick rule preventing hedge funds and other investors from short-selling stocks that declined on their last price movement.

According to Bob Sloan, founder of S3 Partners, there is no question that hedge funds have backed of short-selling for fear of regulatory changes.

Since last April when short-selling bans were first seriously discussed, the ration of long positions to short/borrowed positions has increased 30%, according to the WSJ. The article fails to mention whether some of this shift can be attributed to market performance and expectations rather than fear of new short-selling bans.

SEC Wants Greater Hedge Fund Authority

Schapiro Seeks Larger Staff, Greater Regulatory Control, for Hedge Funds
SEC Chairman Mary Schapiro said today that the SEC "needs" the authority to require hedge funds to register with the agency. Additionally, Schapiro wants the SEC to have the power to examine hedge funds' book. Schapiro also noted that registration without significant oversight and authority "would not be sufficient". "It would be good to have rulemaking authority," she said. "It's good to have flexibility to respond to crises as they emerge."

Schapiro also wants additional funding to provide adequate hedge fund oversight. "With over 30,000 regulated entities and a staff of 3,600 people, we cannot add a couple thousand more hedge funds and get the job done under any circumstance," she said.

"Chinese Warren Buffett" Sued by SEC for Ponzi Scheme

Hedge Fund Manager, Weizhen Tang, 50, of WinWin Capital Management, has been sued by the SEC for running what authorities are calling a Ponzi Scheme. According to authorities, Tang managed about $75 million in assets (barely 1/10 of 1% of Maddoff's fund) and didn't reveal losses of over $15 million in 2007 to investors.

A federal court judge in Dallas agreed to freeze assets and appoint a receiver to recover clients’ money, the SEC said. The agency wants him to forfeit profits and pay unspecified fines.

More interestingly, Tang supposedly referred to himself as the "Chinese Warren Buffett", a claim he denies using until others started calling him by that name.

For years, Weizhen Tang was considered an investment guru in much of the Chinese community in North America. He could supposedly generate a 1-per-cent weekly return.

But Mr. Tang's reputation was dealt a stunning setback during the week of Jan. 26, 2009. That was when he held a public demonstration of his investment strategy in his Toronto office and couldn't match the reported results of his funds.

"Unfortunately the public demo failed," Mr. Tang wrote in an e-mail to investors a few days after the event. "I apologize. I don't want to find any excuses. I need more hard work."

By 2009, Oversea Chinese and WinWin had attracted more than 200 investors who invested roughly $75-million (U.S.) in total, according to court filings. The minimum investment was $150,000 (Canadian) in Oversea Chinese and $250,000 (U.S.) in WinWin. Mr. Tang did not charge a fee on the first 6 per cent of profit, but he took a 25-per-cent cut of any additional profit, according to court filings.

Hedge Funds to Face Greater Regulation From SEC

Mary Schapiro, Chairman of the SEC, is expected to tell Congress today that the SEC is seeking greater regulation for hedge funds, according to the WSJ.

Though many hedge funds managers already register with the SEC, the new proposal would bring all or must funds under the SEC umbrella. They will also seek to regulate individual hedge funds, as opposed to current regulations on the greater fund company. Regulating individual funds would presumably provide greater transparency into the systemic risk posed by larger funds.

Of course, regulation by the SEC is very contentious. How well has the SEC been able to regulate any of the institutions it has primary oversight of? Given that there are several thousand hedge funds in the US, and the SEC's inability to effectively regulate in the past, couldn't greater oversight just be another disaster in waiting?

One of the dangers of SEC oversight is that it would seem to legitimize hedge funds for the typical investor, when in fact, many hedge fund strategies are inappropriate for all but institutions and select individuals. Though the SEC will disclaim having "approved" the fund or its accounting, it will imply this to less sophisticated investors. Will any of them read the 250 page prospectus each fund will be forced to issue?

Preferential Hedge Fund Redemptions

Are hedge funds giving certain clients preferential treatment with regard to redemptions?

SEC Commissioner Elisse Walter believes some funds have done so. “Principals, employees or favored investors of the hedge-fund adviser may have received ‘preferential redemptions’ from the fund at issue.” Walter said in testimony to the House Financial Services Committee today.

More than 1/6 of hedge funds are halting redemptions, limiting withdrawals from certain funds, or altering their redemption schedule.

The SEC is also zeroing in on trading irregularities and lack of due dilligence by feeder funds, such as those that gave money to Bernard Madoff. The SEC claims to be developing new "technological tools" to deal with trading issues such as insider trading and front running.

Madoff May Plead Guilty

It appears that Bernard Madoff may be nearing a plea deal with prosecutors. Madoff was arrested on Dec. 11, 2008 and charged with securities fraud for his leading role in an estimated $50 billion Ponzi scheme. According to Bloomberg, "Assistant U.S. Attorney Marc Litt today filed a one-page document in Manhattan federal court indicating the government will file an “information,” or charging document, after Madoff agrees to waive a grand jury indictment. Defendants who agree to plead guilty to an information often first waive indictment."

According to a former SEC attorney interviewd by Bloomberg, "“Madoff is about to enter his guilty plea. A criminal information is a consented- to criminal charge used to enter a guilty plea.”

The document released today byt the US Attorney's Office does not indicate if Madoff will waive indictment.

In related news today, the SEC announced it has plans to revamp its whistle-blower policy in wake of the Madoff fraud (and presumably the Stanford CD fraud as well). This comes after years of lax enforcement and a culture which seemingly did little to encourage whistle blowers to come forward.

SEC Commissioner Supporting Hedge Fund Regulation

SEC Commissioner Elisse Walt, is supporting greater regulation of US hedge funds, an issue supported by democrats in Congress, particularly after the recent Ponzi scheme involving Bernard Madoff.

"I generally do support that notion (of hedge fund registration)," Walter told Reuters in an interview. "But the devil is in the details. Registration has to be meaningful."

Treasury Secretary Timothy Geithner and SEC Chairman Mary Schapiro also have recently expressed their support for legislation regulating hedge funds and other private pools of capital.

However, given that Madoff's firm was in fact an SEC regulated fund, it is not clear who should have regulating authority nor whether it will be effective.