The Security and Exchange Commission (SEC) has advised the managers of super-secret hedge funds, investments of the most wealthy, that they will soon need to disclose more information to the regulators. Highly leveraged hedge funds contributed to the economic collapse, but the pressure to increase oversight has been mostly ignored by the industry. In response to heavy lobbying by the industry, the SEC has scaled back the requirements the commission intended to issue, leaving softer regulation likely to be ineffective.
Hedge fund managers like to keep their operations secret. If managers were required to report underlying investments, trades, and strategies, they might be at a disadvantage. Like a patented formula for creating pharmaceutical drugs, hedge fund managers rely on their proprietary operations to ensure no imitators and no rogue competitors using their strategies to cause them to fail. Most fund managers need to report their funds’ financial details publicly, with statements that outline the funds’ holdings, risk profile, expenses, and strategy. Hedge funds do not have this requirement.
The new SEC regulations allow hedge funds to file a minimum amount of data pertaining to the investments, and the filing will not be available to the public. Only a small committee within the SEC will be privileged enough to see the information. Additionally, only hedge funds with $1.5 billion in assets will be required to report the most detailed information to the SEC. Funds with over $500 million in assets need only report the extent that the investments are leveraged. Hedge funds with $150 million in assets or left will not be required to report anything.
The required reporting, which grows out of the financial crisis three years ago, is meant to allow financial regulators to monitor the risks that the funds may pose to the nation’s overall financial system, something that officials at the Federal Reserve, the Treasury Department and the S.E.C. did not have during the crisis.
By focusing on the largest hedge funds, it may seem like the new reporting requirements will achieve this goal of monitoring and evaluating systemic risk. Considering that the largest hedge funds can still get away with reporting vague information about their underlying investments, the SEC may still miss big risks.
Should hedge funds be subject to the same scrutiny as publicly traded companies? Does the idea that very few investors take advantage of hedge funds release these managers from public accountability?
Published or updated October 27, 2011.