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Hedge Fund Alert: Obama’s Your Friend

Pulling up a little short on the push to expand regulation.

bout midway through the big thick government proposal to ramp up the regulation of the financial industry is the part that addresses hedge funds. Much to the relief of hedge fund managers everywhere, it isn’t quite the beast they’d all feared.

The Obama plan doesn’t go as far as the one that had some serious support in the Senate as recently as a few weeks ago. That legislation, which had bipartisan sponsorship, would’ve required hedge funds to divulge to the Securities and Exchange Commission the names of investors, and it had much more detailed demands for transparency.

Under the Obama plan, hedge funds would still have to register with the SEC ­— the vast majority of them, anyway, which is to say any firm with more than $30 million in assets under management (although the threshold is still being negotiated, and could end up being closer to $50 million). And it would discard the exemption in the 1940 Investment Advisers Act that says if you have fewer than 15 investors you don’t have to register.

THIS IS NOT A BANANA REPUBLIC

This isn’t registration in the Banana Republic sense of the term, however, which means it entails a lot more than listing your post-office box with the government. It comes with the requirement that hedge fund firms make a habit of opening their records to regulators, allowing the SEC “to come in and scrub the books,” as Neil Morris, a principal at Kinetic Partners.

Morris’s job is to know this stuff -- he’s a CPA who has worked over the years for Ernst & Young, Societe Generale and various hedge fund clients — and he notes that the new regulations facing hedge funds are void of a couple of gremlins in particular: limits on leverage and restriction on fees.

So the Obama plan is a compromise, which appears to be Barack Obama’s true middle name (and the result in no small part of an uptick in hedge fund lobbying in Washington; check out these remarkable stats compiled by the Center on Responsive politics).

WHAT’S A LAW-ABIDING HEDGE FUND TO DO?

“This is a very measured response,” Morris says. “It’s really not that bad.”

His firm issues this pocket-size checklist: “Kinetic Partners believes that the majority of hedge fund advisors are unprepared and will need to take a close look at specific areas such as their compliance manual, code of ethics, employee investment policies governing personal trading, employee checks and balances, annual employee training, annual self-assessment, documentation of entities, and SEC disclosures to current and potential investors, including Form ADV, Form ADV Part 11, and Schedule F. In addition, firms must appoint a chief compliance officer. These areas are among the greatest challenges to most U.S. fund advisors as they traditionally have not been emphasized.”

“Don’t fight the tape,” Morris suggests. “Engage and embrace it.”

AND HERE’S A TIP FOR INVESTORS

“Regulation’s a good thing perhaps because most of it appears to be all about sound business practice,” he adds, although there’s a caveat having to do with what Morris calls a “false sense of security” that will inevitably be attached to regulation. “So some investors will now say, hey, now that they’re registered, somebody’s watching them.” Which of course is not necessarily the case (Google “SEC failed” and “Madoff” if you don’t believe it).

And here’s one other investment tip. Kinetic, which is in the business of dispensing advice on compliance and such, has 750 clients today. It opened its doors just four years ago. It’s in a growth sector. Buy now.

Please send your emails to kcates@iimagazine.com.

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