U.S. Hedge Funds Worry About Expected New Rules By Reuters Thursday, March 26, 2009 NEW YORK (Reuters)âFor years, U.S. hedge fund managers have worried that their loosely regulated and secretive industry would one day face tougher regulations. Now that day seems to be here. "It was inevitable that this would happen," said Brad Alford, founder of Alpha Capital Management, an advisory firm that invests in hedge funds. "From the time Congress had the industry's top hedge fund managers testify late last year, we knew something was coming." Exactly what that something will be, however, remains unclear, managers, their lawyers and investors said on Thursday [March 26], hours after the Obama administration said it plans to press for broad reforms to curb risk taking on Wall Street Previous Reuters Story. "People want a road map and some clarity," Mr. Alford said. All agreed that putting hedge funds on a tighter leash will add new nervousness to an industry already facing poor returns, struggling with redemptions and being blamed for a financial crisis its managers say they did not cause. Specifically, many hedge fund managers and their lawyers say they fear that public outrage over enormous bonuses paid to executives at nearly failed American International Group Inc., plus news of hefty paychecks at hedge fund firms, could prompt lawmakers to try to impose unduly harsh rules. "There is a concern that you will end up with ill-fitting regulations," said Elizabeth Shea Fries, who works with hedge funds as a partner at law firm Goodwin Procter. Hedge Fund Fears Managers are especially fearful they may have to publicly disclose short positions. Short-selling is a tool that is off limits to most traditional funds but that helps hedge funds make money in declining markets. Short sellers borrow stock and sell it, betting that when it comes time to repay the loan the value of the stock will have fallen and the funds can buy it back cheaper, pocketing the difference. Similarly they worry that regulators may favor certain playersâfor example, proprietary traders at banksâwhile imposing new rules on hedge funds. And they worry that a new regulatory regime, particularly with someone charged with overseeing systemic risk, might be murky and possibly even redundant. Already state lawmakers and regulators, including some in Connecticut where thousands of hedge funds operate, are pursuing their own forms of regulation. "How may people do I have to allow to come through my front door demanding a look at my books?" complained one Boston-based hedge fund manager who asked not to be identified for fear of angering regulators who might eventually audit his business. But lawyers also said they are pleased to see the U.S. Treasury Department and Securities and Exchange Commission involved in shaping new rules because it gives them comfort that any regulation would be better conceived and more workable than if lawmakers put it together. "That is where the regulators' participation in this is very useful," Goodwin Procter's Ms. Fries said. Registration Expected Among all of the swirling questions, one thing seems fairly certain, however. Managers of large pools of capital, like hedge funds and private equity funds, will be asked to supply more information about themselves to regulators. For hedge funds, registration was briefly required for some funds a few years ago before a lawsuit threw it out Previous Reuters Story. For small funds this is an especially expensive proposition. "I half expect to have to do it [register], but it is a real expense overload for small funds in actually doing it," Thomas Grossman, principal at hedge fund Union Avenue Advisors, said at this week's Reuters Hedge Fund and Private Equity Summit. Still, tumbling markets and anxiety on Wall Street and Main Street will probably make registration stick. "Registration and disclosure would seem entirely appropriate in this financial environment." Donald Gogel, president and chief executive officer of private equity firm Clayton, Dubilier & Rice, said on the sidelines of a conference. By Svea Herbst-Bayliss Svea.Herbst@ThomsonReuters.com http://www.hedgeworld.com/news/read_newsletter_aa.cgi?section=dail&story=dail15853.html