The Offering: Geffner Says Let Little Funds Be
By Rich BlakeHFA’s Geffner: Let Little Funds be
While it’s still not even remotely clear how the government’s ongoing effort to create a new regulatory framework for the hedge fund industry will play out, one industry member speaking out against possible overregulation is securities attorney Ron Geffner.
Geffner is a partner at the New York law firm of Sadis & Goldberg, and a frequent commentator on CNBC. He’s also on the board of the not-for-profit Hedge Fund Association, essentially an industry lobby group. Geffner views the HFA, which represents several thousand funds, as sort of the voice of all hedge funds, particularly small funds.
Among the things he’s watching is one specific, prominence-gaining piece of proposed legislation: The Private Fund Investment Advisers Registration Act of 2009, sponsored by Pennsylvania Democrat Paul Kanjorski, chairman of the House Financial Services Committee’s capital markets subcommittee. The bill would require funds with more than $150 million in assets to register with the Securities and Exchange Commission and have their books subject to SEC inspection.
“The asset cutoff is far too low,” Geffner says. “Let’s regulate the largest funds first—to do otherwise is an ineffective use of taxpayer dollars during a time of limited resources, and it only offers false protection to investors.”
Focus on the 700 or so management companies that have at least $1 billion, Geffner argues. Many funds are dreading the idea of having to register with the SEC or some other agency, explains Geffner, not because of fears that some trading edge will be lost but rather due to the man hours and money that will be required to meet added layers of regulatory requirements. Large funds are resigned to it, Geffner says. Not so, small ones. “I think there is hope that they’ll raise the asset threshold,” Geffner adds.
Let’s be frank. Any legitimate hedge fund should want to be registered with the SEC in the wake of the financial industry’s near collapse last year; transparency and sunlight are remedies for the credibility battered industry in a post-Madoff world. It should also be pointed out that Madoff was one of the few firms that went ahead and registered with the SEC. His Form ADV, if you read it close you’ll notice he technically screws up the first question.
This past spring I sat down to interview the SEC’s Robert Plaze, the associate director of the Division of Investment Management, for another publication. At that time, blowback from Madoff was very much a driver of the agency’s agenda. Plaze admitted to me that prior to December 2008 he didn’t know who Madoff was; or rather, he knew the name Bernie Madoff, former NASD chairman, but didn’t know that he lorded over a purported asset management empire (obviously that later turned out not to be).
Plaze has been at the SEC since the early 1980s and helped write the rule that revamped once confusing but now wonderfully breezy mutual fund prospectuses. He was the guy who wrote the rule a few years ago that temporarily required hedge fund managers to fill out Form ADVs and be subject to review, a short-lived effort upended by Phil Goldstein’s lawsuit.
Some funds went ahead and registered and even though the rule was struck invalid by the courts many of those funds have remained registered and continue to update their status annually, an SEC source tells me. The source added that there were a few firms that became unregistered and that the SEC is watching them closely (KIDDING), but you funds that registered and then promptly de-registered know who you are. To register or not to register it kind of reminds me of the old Chicago song “does anybody really know what time it is, does anybody really care?”
Bayou was registered with the SEC and FINRA in its capacity as a brokerage and had The Hennessee Group keeping tabs on it. A lot of good that did. Geffner asked me to chase down some info: how many routine inspections of the mutual fund managers and separate account pension fund managers under the watchful eye of Plaze’s Division of Investment Management have ever led to cases of fraud being exposed. I’m on the case and also awaiting an Excel spreadsheet file of the names of the managers that registered and then deregistered, which I hope to soon publish, no joke. The hated hedge fund industry can create jobs and stir the economy and it can have integrity, believe it.
The largest fund managers are bracing for having to register and are not fighting it. Though you can bet that the hedge fund industry main lobby group, the Managed Funds Association (headed up by former House Financial Services Committee Chairman Richard Baker) is not going to take everything lying down. Probably the biggest question right now is whether the SEC is still going to have jurisdiction over hedge funds having dropped the ball so colossally with Madoff.
Then there’s the Obama Administration’s proposal that touches on funds, and four other bills winding through the House and Senate and the European Commission, which has stated that it is inclined to think hedge funds should no longer be offshore. If regulation gets too heavy-handed probably offshore is where most hedge funds will be. Lawyers in the Caymans say they have seen European fund management companies physically relocate there and to Bermuda rather than be subject to new forms of oversight and scrutiny. This is an area I hope to chronicle going forward so reader comments are appreciated.
A Tale of Two Currency Traders
Some hedge funds are notorious for lagging behind on communicating with investors or hardly communicating with them at all. Greg Cotter, founder of Tri Global FX and portfolio manager for the Metro Forex managed accounts program, can’t seem to get his monthly performance out fast enough.
December was not even twelve hours old when the Long Island based currency manager sent word to investors noting his program’s updated performance, with his model portfolio boasting an 18% year-to-date return and a 3-year trailing Sharpe ratio of 3. Call it stock-like returns with bond-like volatility. With $115 million under management, Cotter’s program grinds out returns in the fast moving spot foreign exchange market.
For what it’s worth, Cotter’s far more famous counterpart in the FX corner of the fund world, John Taylor of FX Concepts, cannot claim such profitability this year. After making Alpha magazine’s top earner’s list for 2008, Taylor’s flagship fund is down 16% through October. Quoted in The New York Times last year, Taylor seemed well aware of the Elway-like curse being on a rich list could bring his way. “This is bad luck with the trading Gods,” Taylor said.
Odd Lots
Long: Ramblin’ Gamblin’ Man (Bob Seger)
Short: Ramblin’ Man (Allman Brothers)
Neutral: The Gambler (Kenny Rogers)
December 7th, 2009 at 9:45 pm
I work for a fund of funds. We did not have Bayou or Madoff. However I believe fraud as in the Bayyou caase can only be uncovered by prime broker for Bayou who should have compared Bayou financials to the prime brokers trading records. Consultants and FOF are like stock analysts on wall street who recommended Enron, Tyco. Not one analyst was held responsible for NOT uncovering accounting frauds at those companies. Due diligence is like analyzing a stock for buy,sell,hold recommendation. No FRAUD audit is performed by stock analysts on wall street NOR hedge fund advisers.