Hedge fund managers thinking about skirting Securities and Exchange Commission registration may want to weigh the consequences. A number of hedge funds reportedly are using a longer lockup loophole (two years) to get out of paying the additional costs associated and everything else that goes with SEC registration, but that may be a costly move, as investment firms may start avoiding such managers.
“We don’t like the idea,” Virginia Parker, president of Stamford, Conn.-based Parker Global Strategies, told Investment News about the lock-up option. “It’s inappropriate, and it’s just an excuse to hold money.” Parker and others say registration could be a factor in determining choice of manager and, as one HF manager put it, “lead to a bit of a shakedown,” with some turnover and some avoidance behavior. “It’s really not a good sign,” John Van, CFO at Van Hedge Fund Advisors said in an IN interview about HF managers that don’t register, “because if something should happen, the clients will look at you and say, ‘There was a red flag.’”
What’s more, the longer lockups can create liquidity problems for some – yet another reason to avoid nonregistrants. Which makes the SEC seem so serendipitously savvy: By accidentally putting in a legal loophole, the commission may have in effect created self-monitoring of the hedge fund industry.