New disclosures by hedge funds on the way.

On Wednesday last week new rules went into effect requiring that advisers to hedge funds with assets of more than $30 million register with the SEC, beef up record-keeping and open themselves up to potential SEC inspections.

Eventually this could be good news for IRO’s who struggle to get accurate information about the positions that hedge funds have taken in their firms. However, the new rules fall short of mandating the kind of disclosures that many IRO’s would like to see.

In 15 years the number of hedge funds has risen from 600 to more than 8,000, as assets have soared from $38 billion to more than $1 trillion. Hedge funds account for 10 percent to 20 percent of trading volume in U.S. markets, according to the SEC.
The growth has triggered growing concerns about disclosure and investment practices in a notoriously secretive industry.

"Nobody - neither regulators, industry groups, competing hedge funds, investment banks, nor investors - has a complete picture of the industry," said Roel Campos of the SEC. "Quite simply, the gaps in the available data regarding hedge funds as a group or even individual hedge funds, provide an inadequate basis upon which an investor may evaluate the risk of an investment in such products."

From Wednesday, hedge-fund advisers must file a Form ADV with the SEC. But only Part 1 of that form will be publicly available.

Part 1 discloses whether the fund principals have any criminal convictions or investment related offences. There is a little bit about strategy, but no appreciably detailed information about the fund, its investments and how it operates.

That information is included in Part 2, which is available only to fund clients. Although disclosure may be significant eventually, the most significant immediate impact is the prospect of an SEC examination. And the examination is aimed at curbing the 51 frauds do far detected at hedge funds.

Again from Commissioner Campos, "We essentially want to get information. We want to encourage compliance. We want to encourage disclosure."

This should be music – although a little in the distance yet – to IRO’s ears.