Hedge funds -- not widely covered here because of their general unsuitability for most individual investors -- are in the news today following the release of a report from SEC Chairman William Donaldson that identifies "a number of areas of concern" about the industry. (The report is available online.)
To step back for a moment -- what are hedge funds (also known as private investor partnerships) and why is this news important? Past Foolish columns, including work from Selena Maranjian and Whitney Tilson, himself a fund manager, should help. Selena's article includes several useful links as well.
In short, hedge funds are pools of professionally managed money that only "qualified investors" (who make a certain amount and have a certain net worth) can pitch into. Their managers need not register as professional advisers and aren't required to follow many of the guidelines that apply to mutual fund managers -- giving them increased flexibility but also the potential for increased volatility. While granted more regulatory freedom than thier mutual fund counterparts, managers are not permitted to advertise to the general public.
Among the concerns listed in the SEC report include a lack of uniform disclosure by hedge fund advisers, insufficient information about fund managers' activities flowing to the SEC, and increased fraud. When coupled with the growth expected in the industry -- some $600 billion invested today is seen billowing to $1 trillion in five years, according to the report -- it is clear why the government is interested.
News reports on the topic today could probably have been predicted. People within the industry have discussed their concerns about regulation, while people outside the industry are talking about the need for it. (One industry website worth checking is the Hedge Fund Association's, as it includes more background plus perspective from "the inside.")
But there were also some interesting points raised, including the idea that regulating hedge funds might distract the SEC from its other oversight duties (certainly debatable) and the admission from an industry insider that there are some "soft spots" in the current regulatory setup that might be worth covering (certainly admirable).
What seems most important at this early stage is that the matter is getting attention. This gives investors time to collect information and form opinions. And bear in mind, the recommendations in the report are from SEC staff, and have not been considered by the commission.
