The SEC Is Probing Hedge Funds

by Carla Johnson, Investors Offshore, New York

09 August 2002

Today is the deadline for many larger US hedge funds to reply to a letter sent them two weeks ago by the Securities and Exchange Commission asking for information about their operations.

Harvey Pitt, SEC chairman, said earlier this year that the organisation might seek powers to impose regulation on the booming hedge-fund sector, which is increasingly used by retail investors fleeing turbulent equity markets. Mr Pitt said the SEC would study the sector before announcing its intentions in the fall.

The letter focused particularly on the funds' valuation process, which is often far from transparent, and offers many opportunities for fraud to unscrupulous hedge fund operators. Hedge fund assets are often illiquid, or hard to price.

The SEC is also concerned about the qualifications and background of hedge fund managers. The rapid expansion of the industry has seen a jump in the number of managers employed, and investors often have no means of knowing about them.

A further question deals with the commissions that hedge funds pay to brokerages on various types of transaction.

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