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New York (HedgeCo.Net) – Connecticut has long been a haven for the hedge fund industry; where light regulation and a dense population of ultra wealthy investors lure the most talented of hedge fund managers.  But if some state lawmakers have their way, hedge funds will have to jump through a lot more hoops than they are used to, according to the Hartford Business Journal.

Under current law, hedge funds only allow accredited investors who have a net worth of $1 million or higher to participate.  The proposed legislation would bump that minimum requirement up to $2.5 million, with institutions needing at least $5 million in assets.

The new legislation would also require hedge funds to provide greater transparency by disclosing their fees and other information about management or investment strategy.  Hedge funds would also be required to obtain a state license as well as have an independent annual financial audit performed.

Many fear that by imposing these guidelines, Connecticut would have less of a draw, and many hedge fund managers could simply pack up and move to nearby metropolises like New York or Boston.

The pull for stricter oversight on hedge funds is by no means limited to the state level.  Many members of Congress have been pushing for greater transparency after hedge funds got blasted for having a hand in the financial crisis thanks to controversial practices like short selling. 

Others push for heightened regulation due to the recent outbreak of Ponzi schemes from so-called “trustworthy” individuals, like Arthur Nadel of Sarasota or the obvious case of Bernard Madoff where hundreds of investors were swindled out of their retirement.  However, many who oppose the oversight based on increased fraud argue that investors are ultimately responsible for where their money goes and should perform greater due diligence themselves before trusting anyone with large sums of capital.

Republican State Representative John Stripp told the Hartford Business Journal that it’s not about a “vendetta against hedge funds,” just that “there is a need to have some kind of regulation in place.”

Even European finance ministers agreed this past weekend to the direct regulation of hedge funds overseas, leading most to believe that the era where hedge funds could get away with anything, is coming to an abrupt end.

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

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Globe and Mail – Daniel Gross, writing on Slate, makes an interesting point about the latest version of the U.S. government’s bailout plan: The plan, officially known as the Emergency Economic Stabilization Act of 2008, looks a lot like the prospectus for a hedge fund.

“In the past, hedge funds – secretive pools of capital – were open only to qualified (read: rich) investors,” he said. “But with the stroke of a pen, President Bush will soon make all American citizens investors in the world’s biggest fund – and a democratic one at that.”

Hedge funds often use leverage, or borrowed money, to amplify their returns and often use the money to buy beaten up assets. Similarly, the bailout plan, which Mr. Gross dubs the Universal Hedge Fund, will use $750-billion (U.S.) of borrowed money to buy distressed assets. But the similarities don’t end there. The manager of the Universal Hedge Fund can hold bonds to maturity or flip them for a profit. The manager can also bring in outside expertise, making the fund look like a fund of funds.

“Like many of today’s sharpest hedge funds, the Universal Fund will also have the ability to drive a harder bargain by demanding equity stakes, or new debt securities, from the institutions it is helping,” Mr. Gross said.

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New York (HedgeCo.Net) – Credit rating agency Moody’s said on Tuesday that it would probe deeper into why its staff incorrectly rated approximately $1 billion of complex debt securities.

While it was thought to be a computer error that caused the discrepancies in ratings, an external investigation by Sullivan & Cromwell revealed that some members of a key ratings committee violated certain codes of conduct while dealing with constant proportion debt obligations, or CPDOs.  An expose produced by the Financial Times originally shed light on the errors.

“I am deeply disappointed by the conduct that occurred in this incident,” said Moody’s CEO and Chairman Raymond McDaniel.  “The integrity of our rating process is core to Moody’s values and is essential to the market.”

CPDOs were awarded the highest "Triple A rating" when they first appeared in 2006.  It then came to be known that they were actually associated with risky instruments.  Moody’s insists that the error was not intentional.   Some investors who snatched up CPDOs lost over half of their capital.

Following the subprime fallout last summer, Moody’s, Fitch and Standard & Poor’s have downgraded hundreds of billions worth of debt, creating substantial losses for investors and causing the implosion of several hedge funds. 

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
Be sure to check out our sister sites. For more information, visit www.hedgeconetworks.com

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