Hedge fund industry giants unhappy with the Security and Exchange Commission's manager registration rule are imposing lock-ups of investors' money, for two years or more, Lipper reports. The registration rule goes into effect on Feb. 1, 2006,
The impending rule has prompted many managers to find loopholes in the system and avoid the arduous task. One of the ways to escape is to impose a lock-up period. The SEC's new hedge fund registration rule stipulates that locking up an investor's funds for two years exempts the investment advisor from registering. The exception was created to shield private equity and venture capital funds, which typically have long lock-up periods because of their long-term outlook.
But the SEC clearly underestimated the number of managers that would take advantage of this exception. The SEC originally estimated that 1,200 hedge fund managers would register, but as of September only an average of 100 hedge funds were registering each month.
So why are hedge funds so resistant to registering? The large companies are capable of complying financially, but don't want to deal with the hassle; some estimate it takes 80 hours to complete the registration task. The small firms say that the registration fees are too high. It could cost up to $500,000 to register, according to some estimates. That includes the cost of hiring a chief compliance officer, setting up policies and procedures, buying insurance, retaining documents and registration fees.
Experts estimate that, in the end, a large number of hedge funds will not comply with the rule that SEC put in place to protect investors and that the two-year lock-up may become a permanent feature of the hedge fund industry. Charles Mathys, senior legal compliance officer at UBS Alternative and Quantitative Investments LLC, said that up to 30% to 40% of the U.S. hedge fund industry will not register with the SEC.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.