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Hedge fund industry comes under SEC fraud spotlight Print E-mail
29/05/2002

by Nat Mankelow

The US stock market regulator, Securities and Exchange Commission (SEC), is reviewing the possibility of fraud in the $500bn hedge fund industry following several enforcement cases (violation of securities laws) involving the funds.

SEC chairman, Harvey Pitt, said in a speech to the Investment Company Institute, which represents the US mutual fund industry: "We are concerned about the implications flowing from the growth in these private investment funds."

The review, being overseen by SEC's investment-management unit, may lead to tighter controls over the largely unregulated funds, he said. Hedge funds do not have to report their finances to the government, and SEC information about them "is sketchy," Pitt said.

Hedge funds, which are in common use in the US compared to most of Europe (certainly the UK market) has attracted "the less sophisticated investor" in recent years, and it is this that is worrying regulators. "The lack of regulation leaves the funds more exposed to fraud."

"Our goal is to determine whether the present state of regulation — or perhaps more accurately the lack thereof — is in the public interest," concluded Pitt.

Recent figures suggest pension funds in the UK will be allocating anything from two to four per cent of assets to hedge funds by 2003-end.


PITT SPEECH EXTRACT, Washington DC, May 24, 2002:

"By all accounts, private investment funds have experienced a seismic boom in both number and total assets under management. But, since these entities are not subject to reporting requirements, the information we have about them is sketchy. We are concerned about the implications flowing from the growth in these private investment funds. Accordingly, we will seek a better understanding of the issues currently affecting these vehicles by commencing a formal fact-finding investigation to enlighten us about:
  • incidents of fraud that we have seen with certain of these vehicles, particularly hedge funds;
     
  • conflicts associated with managing these vehicles alongside mutual funds; and
     
  • marketing these vehicles directly and indirectly to retail investors.

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