Hedge Fund Registration: Yesterday’s Regulatory Schemes for Today’s Investment Vehicles

Abstract

Hedge funds have become some of the most influential players on Wall Street in the past decade. In 1990, there were approximately 300 hedge funds with $39 billion in assets under management; the most recent studies estimate that there are 8000 to 9000 hedge funds with nearly $1 trillion in assets under management. The secretive nature of hedge funds, the general public’s lack of knowledge about hedge funds, the potentially market-destroying collapse of Long-Term Capital Management, and the monumental growth in the industry have drawn strong media exposure and have piqued the interest of regulators across the nation. The 1992 Joint Report on the Government Securities Market dedicated seven pages of a nearly 200 page report to a cursory discussion of hedge funds. A decade later, however, the government had commissioned two separate studies just to deal with the growth of hedge funds. The culmination of the government studies resulted in changes to the hedge fund legal landscape. Under a new rule, hedge fund managers were required to register with the Securities & Exchange Commission (“SEC” or “Commission”), a move that required managers to report the financial statements of their funds to the SEC and to adopt more stringent compliance and regulatory controls. The new rule, however, was deemed an arbitrary rule because there was “a disconnect between the [risky] factors the Commission cited and the rule it promulgated[.]” The D.C. Circuit Court therefore vacated and remanded the rule. This Note argues that a registration requirement by the SEC will not provide increased protection–over the fairly comprehensive, already existing body of securities law–to investors, particularly when comparing the effects of imposing new rules on hedge funds with the effects of imposing new rules on mutual funds. More specifically, the current state of the financial and legal regulatory environment, and the types of investment vehicles being scrutinized, are sufficiently different from the state of affairs preceding the first round of regulation. Thus, hedge fund investors will not realize the intended benefits of the regulation. Finally, this Note offers proposed solutions to better address the concerns of the SEC in terms of providing more transparency to potential investors and, more importantly, better insulating the market and investors from the potentially crippling effects of hedge fund investment methods in volatile markets.