Alternative Investment World Shudders After Beacon Hill Debacle

by Carla Johnson, Investors Offshore, London

14 November 2002

The issue of transparency is topping the agenda at this week's Global Alternative Investment Management Forum, taking place at Geneva's Intercontinetal Hotel, after investors were shocked by last week's revelations regarding hedge fund Beacon Hill in the US.

Several weeks after the fund told investors about losses of 50% of its assets, which it claimed were due to heavy volatility in the bond markets, the Securities and Exchange Commission last week filed a civil-fraud complaint against the firm alleging that at least during the period from July through September, Beacon Hill reported net asset values and returns to its investors "that it knew or should have known were materially overstated."

The SEC said that in September Beacon Hill executives told the firm's prime broker, Bear Stearns Cos., that the hedge funds were valued at $756 million. But on Oct. 1, Bear Stearns presented its own calculation of the value of the funds, and it only added up to $256.9 million.

The SEC in the United States and the FSC in the UK are probing the entire hedge fund industry with a view to subjecting it to a greater degree of supervision that it currently receives, and such incidents can only increase the likelihood of additional regulation.

Lack of transparency is one of the main complaints against hedge funds, and has come to the fore in recent months as major traditional investors such as pension funds seek to broaden the range of their investments. The industry is faced with a choice between subjecting itself to greater regulation as the price of expanding its clientele to 'retail' investors and the institutions which represent them, or remaining as a side-show with appeal only to higher-end investors and professionals.

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