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. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.
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Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke, also known as Flexo, has contributed to PC World Magazine, US News, Forbes, and other publications. 
{ 10 comments… read them below or add one }
In my opinion all hedge funds should be subject to highest level of disclosure regardless of asset size. Further I think the SEC should revist the requirements and put more “teeth” into the disclosure requirements as origninally intended. While I understand the proprietary nature of many hedge funds, the reality is the bigger ones can drive the markets as we witnessed via the shorting some of them did during the market decline of 2008-09. It is true that the majority of investors do not invest in hedge funds, their actions can have a major impact on the markets for all investors.
Hedge funds should not be treated different than mutual funds, stocks and other investments.
Hedge Funds do not deserve any special treatment whatsoever. There should be strict disclosure rules and regulations should not be watered down because this cycle of wall street doing what they want will continue.
If there is not complete disclosure, then investors should be forewarned that their money is at a risk that they cannot calculate.
Hedge funds should disclose the same information as every one else.
It is easy to attack hedge funds, but all they are doing is taking advantage of the investment rules that are provided to them. Why should they have to provide what they are investing in any more than any small investment group?
If it is the leveraging or “financial weapons of mass destruction” that the SEC has a problem with – go regulate those. If they don’t exist the hedge funds can’t take advantage of them.
Didn’t Bernie Madoff run a hedge fund?
His massive fraud alone would seem like good evidence that hedge funds need to have better regulation and scrutiny.
I think hedge funds should be subject to the same rules as mutual funds and other investment funds.
All managed funds should be required to disclose the investments and the portion of total each investment accounts for on at least a quarterly basis. I don’t think how they determine what to buy and sell should be public knowledge. This information should be allowed to remain private just like many other trade secrets.
If it is about transparency, regulation, protection of the average consumer and avoiding huge “bail outs” then yes, why wouldn’t they be subject to the same rules as other investment products. We should learn one lesson from all this turmoil: Disclosure is our friend and needs to happen regularly.