Will Lock-Up Loophole Haunt HFs?

With the fate of the Securities and Exchange Commission’s hedge fund registration rule now in the balance, some observers wonder how the court ruling will affect hedge funds that skirted registration by taking advantage of a loophole that exempted funds with lock-ups of two years or more. “Investors will be more aggressive to seek to have those managers either justify lock-ups for business reasons or rescind them,” Barry Barbash, a partner at the law firm Willkie Farr & Gallagher in Washington, D.C., and a former SEC lawyer, told the Chicago Tribune. Such attempts may have hedge funds kicking and screaming. Michael Gray of the Chicago law firm Schwartz Cooper, who represents hedge funds, says his clients are “not going to give it up,” meaning the money. Some clients may not care one way or the other. “Lock-ups should not be a problem” for long-term investors, says Scott Malpass, who is chief investment offer at University of Notre Dame, since they tend to give managers “a full market cycle of four to five years to perform” regardless of the lock-up.