Institutional Investor's Alpha Magazine - February 2008 - (Page 44)

Timothy Barrett, CIO of the San Bernardino County Employees’ Retirement Association, already requires transparency from hedge funds. well with the large hedge funds that operate in California and have chosen not to register with the SEC. Many major players — including Citadel Investment Group, SAC Capital Advisors and Silver Point Capital — have ofﬁces in the state even though they are headquartered elsewhere. “If this amendment passes, hedge funds in California are going to have to register either with the SEC or with the state,” says Broadhurst. He adds that the possibility of additional regulatory oversight could be enough for some ﬁrms to simply pack up and leave. Since the unraveling in 2005 of the SEC’s effort to force hedge funds to register — a lawsuit brought against the agency by Phillip Goldstein, founder of Saddle Brook, New Jersey–based activist hedge fund ﬁrm Bulldog Investors, led to a ruling by the U.S. Court of Appeals for the District of Columbia Circuit that the regulator had overstepped its authority — individual states have started to try to force greater transparency. In addition to California’s DuFauchard, authorities in Connecticut and New York, the two states with the highest concentrations of hedge fund managers, have been considering efforts to require some form of state-level registration. Anxious to avoid a latticework of different regulatory requirements, hedge fund managers, who have historically largely ignored state politics, are mobilizing. “The Goldstein decision brought this issue to the states’ attention, and now they are stepping into the breach,” says Andrew Lowenthal, a lobbyist with Washington, D.C.– based Porterﬁeld & Lowenthal, which does government relations work. His ﬁrm represents the Coalition of Pri- vate Investment Companies, an industry group formed by James Chanos, CEO of New York–based hedge fund firm Kynikos Associates, shortly before the Goldstein decision. The CPIC demonstrates just how serious hedge funds are about getting involved with public policy as it becomes increasingly apparent that they will have to accept some level of enhanced oversight — particularly as their industry’s growth is fueled by money from institutional investors like public pension funds. Hedge fund ﬁrms are making it clear that they would prefer regulation to come from federal authorities. But DuFauchard, as a protector of California’s investors, sees it as his duty to bridge the gaps in the federal government’s oversight of the hedge fund industry. “My intention is to address the fact that there is insufﬁcient registration among managers advising hedge funds that are tailored to individual investors,” he says. California is a popular location for hedge funds. Of the 1,453 U.S. hedge fund and fund-of-hedge-fund managers that report to Chicago-based data provider Hedge Fund Research, 214 are headquartered in the Golden State. Although most of the biggest, including Canyon Capital Advisors in Beverly Hills and San Francisco’s Farallon Capital Management, are registered as investment advisers with the SEC, many small to midsize managers that are not registered would have to do so under the new proposal. California’s private equity managers, family ofﬁces and other investment advisers would also be subject to the new rule; only venture capitalists would be spared. Registration is being dismissed by some of California’s institutional investors. Timothy Barrett, CIO of the $6.2 billion San Bernardino County Employees’ Retirement Association, says his organization already requires greater transparency from hedge fund managers than do either state or federal regulators. “Being registered is a nice ﬁrst step, but we go far beyond that,” says Barrett, whose fund has allocated 16 percent of its assets to hedge funds and private equity and an additional 7 percent to portable alpha. California’s current registration exemption for hedge funds owes its existence to the venture capital industry and the efforts of Shartsis Friese’s Broadhurst. Before 2002, California law required state-based investment advisers that were not registered with federal regulators to register locally. Venture capital ﬁrms, however, historically didn’t abide by the rule, arguing that they didn’t need to because they don’t dispense advice directly to investors. In 2002, California’s venture capital community successfully lobbied state legislators for language that would ofﬁcially exclude venture capital ﬁrms from registration requirements, and Broadhurst persuaded them to include hedge funds and other investment advisers in the exemption. It is this language DuFauchard is now trying to rewrite. Under the 2002 rule change, investment managers don’t have to register if they do not advise the general public, have fewer than 15 clients, are already exempt from SEC registration and have at least $25 million in assets, or Photo by Scott Council for Alpha 44 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2008

Institutional Investor's Alpha Magazine - February 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Alternative Perspective The Good Guys: A Simple Plan Cover Story: Energy and Commodities: Fueling Opportunity Regulation: Energy Trading: The Brawl on the Hill Interview: Master of Values Regulation: Hedge Fund Registration: Way Out West Research Center: Top Hedge Fund Analysts Alpha Bytes: Rocket Man Unhedged: Commentary: Structured for Success

Institutional Investor's Alpha Magazine - February 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.