Connecticut Lawmakers Want Tougher Hedge Fund Rules
Times are tough for hedge funds, and they’re likely to get even tougher. Taking their lead from Capitol Hill, Connecticut lawmakers have proposed three new bills designed to dramatically shake up hedge fund business in that state with stiffer rules governing hedge fund transparency and oversight.
For years, Connecticut - which is home to hundreds of hedge funds - has taken a hands-off approach to hedge fund regulation. Until now that is. As reported Feb. 23 in the Hartford Business Journal, Connecticut’s proposed legislation would require hedge funds to obtain a state license, provide annual financial audits and disclose fees and any changes in management or investing strategy.
The plan also would bar individuals with less than $2.5 million and institutions with less than $5 million in assets from investing in a hedge fund. Stricter rules to promote transparency for hedge funds that hold investments from pension funds are an integral part of the Connecticut legislation, as well.
Connecticut’s hedge fund legislation comes on the heels of similar recommendations currently being touted in Washington. The Hedge Fund Transparency Act of 2009, which was introduced in the Senate on Jan. 29, would impose stricter regulatory oversight of hedge funds.
For years, hedge funds have operated in what many call a regulatory black hole. Despite the fact that more than 9,000 hedge funds exist today, the industry remains largely unregulated. There are no mandatory requirements for hedge fund managers to register with the Securities and Exchange Commission (SEC) or to provide detailed financial disclosures about their investing strategies.
This laxness may in part be responsible for the record number of hedge funds that shuttered in 2008. According to Hedge Fund Research, 920 funds closed down this past year. Of the survivors, the majority posted dismal performances. On average, hedge funds lost more than 18% in 2008.
Hedge funds also have been in the hot seat for their role in short selling and credit-default-swaps, both of which are at the core of the nation’s credit meltdown.
The arrest of hedge fund manager Bernie Madoff added further tarnish to the reputation of hedge funds, with many people citing the industry’s lack of transparency as the reason Madoff, who is accused of running a $50 billion global Ponzi scheme, went undetected from federal authorities for so long.
The bottom line: Heightened vigilance of hedge funds isn’t just a good idea, it’s critical if we want to protect investors and mitigate further risk to the nation’s already troubled financial system. For too long, this once-secret-but-powerful financial sector has operated under a veil of secrecy. It’s time to lift that veil.
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