Institutional Investor's Alpha Magazine - February 2008 - (Page 45)

Hedge Fund Registration if they provide advice only to venture capital companies. The change would allow venture capitalists to maintain that privilege, but would strip hedge funds and other advisers of their exemption. DuFauchard cites the growth of the hedge fund industry, its broader participation in the market and the increase of fraudulent hedge-fund-related activities as reasons for the repeal. “People are going to have to pick their regulator,” says Broadhurst. If hedge funds want to maintain operations in California, he explains, they will have to register with the state or the SEC. Immediately after DuFauchard’s proposal was released, the Managed Funds Association — a Washington, D.C.– based organization representing the hedge fund industry — swung into action. The MFA organized a group of professionals from some of the U.S.’s biggest hedge funds to study the potential change and discuss strategy. To bolster its effort, the MFA paired with Chanos and the CPIC. In December the MFA and the CPIC sent an 11-page letter to the Department of Corporations, urging that it reconsider its position and table the issue until there is more clarity regarding registration at the federal level. The two groups also hired Sacramento-based lobbying ﬁrm Manatt, Phelps & Phillips to give them a louder voice among legislators. “We wanted expert advice on how California operates — to know who we should contact within the administration,” says Porterﬁeld & Lowenthal’s Lowenthal. Following the advice of Manatt Phelps, Lowenthal and representatives from the MFA flew to California for a series of meetings with DuFauchard, ofﬁcials from the California Business, Transportation and Housing Agency — which oversees DuFauchard’s ofﬁce — and members of Schwarzenegger’s staff. Both DuFauchard and Schwarzenegger know a thing or two about hedge funds. DuFauchard, an Oakland native, practiced law in the San Francisco Bay Area for more than 20 years before taking on his current assignment. At Bank of America Corp., where he was assistant general counsel from 1997 to 2005, he dealt with shareholder litigation against the bank following losses in 1998 from its failed partnership with hedge fund giant D.E. Shaw Group and worked with hedge funds large and small through BofA’s prime brokerage business. Schwarzenegger knows hedge funds as an investor. A multimillionaire from his acting and bodybuilding days, the California governor has had money with several hedge funds and private equity managers, including London’s Lansdowne Partners and Santa Monica, California–based Oaktree Capital Management. (Both are registered with the SEC.) Judith Posnikoff, managing director and co-founder of Irvine, California–based Paciﬁc Alternative Asset Management Co., which has $14 billion in funds of hedge funds, says most of the California managers with which her ﬁrm invests are already registered with the SEC. In fact, she notes that Paamco itself registered in 2000, as soon as it was able to do so. “The decision was based on what we do and the types of clients we have, which include a lot of public pension funds,” says Posnikoff. “It is just part of doing business.” But at the San Bernardino County Employees’ Retirement Association, which was honored in 2007 as an exemplary public employees’ retirement plan by the California State Senate, CIO Barrett has little conﬁdence that regulators at the state or federal level can take the lead in oversight of his plan’s alternative investments. San Bernardino has an extensive oversight and review structure for its alternative investments, including legal documentation, that relies on both internal and external counsel, an outside consultant and an independent operational review of managers’ practices. DuFauchard is quick — PRESTON DUFAUCHARD, to note that his proposal COMMISSIONER, CALIFORNIA is intended to protect DEPARTMENT OF CORPORATIONS individuals — not institutions. “I find it very difﬁcult to justify any governmental interest in registering hedge funds that are used by institutional investors,” he says, adding that his ofﬁce does not have the resources to monitor large, complex managers. For their part, the MFA and the CPIC believe that an effort already under way in Washington by the President’s Working Group on Financial Markets will address many of the commissioner’s concerns. In September 2007 the Working Group established two advisory committees — one for investors, chaired by Russell Read, CIO of the $246 billion Sacramento-based California Public Employees’ Retirement System, and a second for hedge fund managers — to look into many of the issues raised in DuFauchard’s proposal. And with the committees expected to issue standards of best practices for hedge funds and their investors imminently, California’s hedge fund community has been urging DuFauchard to hold off on any decision regarding the state’s registration requirements. “I think it is prudent for the commission to wait to see how things on the federal level play out,” says MFA legal counsel Alicia Lewis. Hedge funds’ pleas have not fallen on deaf ears. DuFauchard extended the comment period for California’s rule change to the end of March, from the end of November, allowing time for the President’s Working Group to publish its reports and for the SEC to weigh in on a potential rule change that would raise the minimum net worth requirements for individuals to invest in hedge funds. “I’d like to wait and see what comes out of the Working Group,” DuFauchard says. After that he will decide whether to move forward with his proposal or — as some hedge funds now dare to hope — drop it entirely. “There is insufﬁcient registration among managers advising hedge funds that are tailored to individual investors.” FEBRUARY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 45

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.