WASHINGTON (AP) – The head of the Securities and Exchange Commission on Wednesday reiterated concern about hedge funds, traditionally an investment outlet for the wealthy that are increasingly luringsmall investors.
“I believe the time has come for us … to review hedge funds and how they are operated, managed and regulated. We are looking to ensure investor protection,” SEC Chairman William Donaldson said at the start of a two-day conference on hedge funds.
The SEC has been investigating hedge funds since last spring after seeing an increase in fraud among the high-risk funds. The agency has brought several enforcement cases along that line in recent years.
The SEC also issued an “investor alert” in February advising investors to check out the background of hedge fund managers as well as the fees charged by funds.
Like mutual funds, the speculative hedge funds pool investors’ money and invest it in various ways in an effort to get the highest return possible. But unlike mutual funds, they mostly are not registered with the SEC and therefore subject to few controls.
Investors in hedge funds don’t receive the full protection – such as disclosure of fund information – afforded other investments under federal and state securities laws. About 5,700 hedge funds operate in the United States with some $600 billion under management.
Donaldson sounded the same note of concern about protecting ordinary investors in testimony last month to the Senate Banking Committee, but he also said that regulators shouldn’t go too far and impede high-risk investments that can offer high returns.
Legislation or rules shouldn’t dictate how hedge funds operate, and fuller disclosure by funds may be sufficient to stem abuses, he suggested.
Donaldson, who spent much of his working life on Wall Street as an investment banker and chairman of the New York Stock Exchange, made clear later to reporters that this was his personal view, not that of the five-member SEC.
To attract smaller investors, funds of hedge funds – which invest in several hedge funds rather than individual securities – have sprung up recently and offered lower minimum entry requirements than traditional hedge funds, such as $25,000 compared with $1 million. Some funds of hedge funds have registered with the SEC and are thereby required to provide prospectuses to investors and file semi-annual reports with the federal agency.
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On the Net:
“Investor alert” on SEC Web site: http://www.sec.gov/answers/hedge.htm
