Retire Rich

October 1, 2007

Hedge Fund Best Practices Step in the Right Direction

The President's Working Group on Financial Markets will form two private-sector groups to develop best practices for the hedge fund industry, and while it comes far short of requiring hedge funds to register with the Securities and Exchange Commission, this is welcome news, both for investors and the market.

The working group, which is being run under the Treasury Department, is suggesting best practices in lieu of regulation, which it fears could preclude hedge funds from innovating new investment strategies.

One of the groups will develop best practices for hedge fund investors, helping them to assess such funds and decide whether to invest in them. The other, targeted at hedge fund managers, will concentrate on trading practices, valuation and recordkeeping.

The timing is critical, for, as sister publication Securities Industry News recently reported, in an increasingly crowded market, hedge fund managers are taking on more risk, and the chance that they could turn to illegal activities is rising. Ways that hedge funds might commit fraud include misreporting assets or returns, self dealing, insider trading and failing to disclose liabilities.

"Fund manager fraud is the No. 1 reason for serious loss, defined as greater than 50% in a hedge fund," according to Mark Sunshine, president of First Capital, which provides credit services to hedge funds. "Because this is essentially an unregulated industry, there is little timely oversight of the managers."

Increasing risk in hedge funds is the fact that many are turning to such exotic instruments as derivatives and structured products to boost returns. These can not only inflate returns on the upside, but do the same on the downside.

"Often, derivatives and structured products have a built-in leverage or gearing effect, which may make the effect of a change in an underlying or reference asset more severe than otherwise," said Anna Pinedo, a partner with Morrison & Foerster. "A thorough understanding and careful review of each product is required to be certain that the people at the hedge fund monitoring the portfolio understand the risk exposure."

Let's hope the best-practices groups take this into consideration.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

http://www.mmexecutive.com http://www.sourcemedia.com

Recent Posts

Mutual Funds Must Go High-Tech-v. 3.0

Over the last number of years, mutual fund transfer agencies and shareholder communications companies have tried to convince shareholders to accept paperless summary prospectuses, proxies, trade confirmations and electronically stamped signatures. Fund supermarkets and web home pages have broadened their horizons to include market commentary, videostreaming and personal financial news. At the same time, exchange-traded funds, funds-of-funds, hedge FoFs, unified managed accounts, target dates, 401(k) auto enrollment and heightened awareness among people throughout the country of the difficulties of being retired-have taken off.

Test of the Massey Mine

Fund giant boards of directors at AllianceBernstein, American Funds, Fidelity, Vanguard and others are reportedly starting to bring about meaningful change in the corporations in which they are invested. Proof should come any day now, when the shareholder proxy votes from the annual meetings are released. Fund chief executive officers spoke about the power and influence their proxies wield in an interesting Reuters article last week, "Mutual Funds Seek to Shed 'Rubber Stamp' Tag."

Milestones

In 2011, 401(k) plans will turn 30, but the milestones the mutual fund industry has reached in this time are but a nanosecond in the history of U.S. retirement policy. Executives we interviewed for this special edition of Money Management Executive for the Investment Company Institute's meeting in Washington, speak to important milestones of the recent past and into the future. Look inside for observations and forecasts by Ted Benna, Robert L. Reynolds, Dan Fuss, David C. John, Steven Miyao and others.

At Age 30, It's Time for a Revamping for the 401(k)

This year marks the 30th anniversary of the 401(k), the revolutionary retirement savings vehicle that has been annihilating pension plans, empowering individuals to take part in the stock market-and, sadly, that left retirees with the misfortune of leaving the workforce in 2000 or 2008 very badly off. The cracks in the system are prompting many asset managers, regulators and retirement experts to take a hard look at 401(k)s and how they can be fixed.

Index of Posts

0 Comments

Be the first to comment on this post using the section below.

Add Your Comments...

Already Registered?

If you have already registered to Money Management Executive, please use the form below to login. When completed you will immeditely be directed to post a comment.

Not Registered?

You must be registered to post a comment. Click here to register.