Hedge Fund Reader : Is it wise for small hedge funds to not register themselves with SEC?

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August 12, 2005

Is it wise for small hedge funds to not register themselves with SEC?

There seems to be absolute contradiction between what the SEC wants to and what it has actually done. SEC under William Donaldson passed a resolution which demanded that any hedge fund with total assets under management of over $25 million has to be registered with SEC. This was done in order to safeguard the interest of investors especially the smaller ones. But what it did not realize is that the smaller investors are more likely to invest in smaller hedge funds. This is directly proportional to their own comfort with the size of the fund in which they are investing. Now what has happened is that this very investor, who was to be shielded by the SEC, is now more prone to losses when these small hedge funds collapse. The registration rule states that there is no need for hedge funds managing funds lower than $25million to register with SEC. But on the flip side the argument in favor of exemption stems from the fact that the cost of registration itself is quite tiresome as well as expensive and hence it is wise to not force them to register. Money.cnn.com reports:

“Some say the SEC's desire not to place undue burdens on small business is understandable, but when applied to the new hedge fund regulation, the $25 million exemption leaves the smallest funds unregulated – and it is precisely these funds that are more likely to attract individual investors, the group the SEC exists to protect. “

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August 12, 2005 in Research | Permalink