As a federally mandated registration deadline nears, many hedge fund managers are considering longer lock-up periods to elude the regulation, a recent report from Reuters indicates.
Beginning next year, hedge funds with more than $30 million in assets and/or more than 15 clients must begin reporting more to the government by submitting audits, appointing a chief compliance officer and adopting a code of ethics.
But a little-known loophole may offer a way for thousands of hedge fund managers to continue their freewheeling ways. If they choose to keep investor assets for two years, they can skip the registration headache and all the paperwork and client costs that go along with it, Reuters observes. For example, a law firm typically charges $30,000 for composing a fund manual, and a compliance firm could charge upwards of $50,000 annually to ensure that fund's documentation is up to snuff.
There are, however, a couple of hitches. For starters, any manager that asks an investor for a two-year lockup better have an outstanding performance record, especially since the popularity of hedge funds is based largely on an investor's ability to move in and out of the fund.
And then there are the regulators at the Securities and Exchange Commission, Reuters notes, who have already stated clearly that they won't tolerate any abuses of the loophole.