Hedge Fund Exchange

EU policymakers point to new hedge fund rules

Hedge funds have not been a main cause of the financial crisis but have exacerbated the turmoil and better regulation is needed, central bankers and government officials said on Friday.

German Chancellor Angela Merkel, French President Nicolas Sarkozy and EU Internal Market Commissioner Charlie McCreevy have all urged tougher rules for the financial industry given a crisis that has triggered economic slowdown and public anger.

The $1.3 trillion hedge fund sector is making a last-ditch effort to avoid a wave of EU regulation.

"We need Europe-wide registration," Dietrich Jahn of Germany's finance ministry told a public hearing.

Hedge funds, investment funds permitted to pursue a wider range of of strategies than traditional funds, stand accused of destabilising some financial shares through short selling, prompting regulators to introduce curbs in many EU states.

"The hedge fund industry has not been a prime source of the problems we are now in," said Aerdt Houben, director of financial stability at the Dutch central bank.

"At the same time they have been a factor amplifying the cycle. These cyclical movements come with real costs in terms of unemployed people."

The hearing was organised by the EU's executive European Commission to see whether new rules are needed for the hedge fund and private equity industry.

The EU's McCreevy told the hearing on Thursday that closer direct regulatory and supervisory oversight of hedge funds and private equity was inevitable.

He will present an "appropriate legislative proposal" in April.

The industry privately accepts it is now a question of how tough the new rules will be rather than if there will be any.

"We did not in any way contribute to systemic risk," said Antonio Borges, chairman of the Hedge Fund Standards Board, an industry body. But he conceded: "The future will have to include a lot more disclosure."

He said banning short selling was a mistake as it signalled to investors the market was being manipulated, causing them to flee and further undermining confidence.

CONTAGION EFFECT The bulk of the world's hedge fund industry is based in New York and London where they are largely supervised via their prime brokers, which are banks.

"We will have registration, we will have some form of integrity testing of the people running the funds. There will be some form of reporting requirements," the Dutch central bank's Houben said.

He said hedge funds had created contagion in the crisis through their impact on market prices.

"This is something (which) as central banks we are concerned with and the political community seeks to address," Houben said.

Gareth Murphy, a senior adviser to the Bank of England, said no hedge fund had needed bailing out but there are concerns.

"We worry about the potential for the prime broker arm of a bank to fail because of exposure to a hedge fund," Murphy said.

"There is a need for information and our focus should be thinking about information to understand what's going on and to monitor risk," Murphy said.

The hedge fund industry says it is already regulated in the EU, noting that the top 30 funds in London provide information to regulators.

"We do not see hedge funds as a mega source of systemic risk. They are systemically important," said Segun Aganga of Goldman Sachs prime brokerage.

Industry officials said the sector was given more attention than it deserved as the total short positions in the United States were equivalent to just 2.2 percent of the stock market.

Long positions held by the sector in the United States were equivalent to 2.9 percent of the U.S. market, less than the assets under management at a big fund like Fidelity.

The G20 meets in London in April to push ahead with financial regulatory reform and wants a global approach to changing market rules.

Borges said regulation on the two sides of the Atlantic were very different with Europe taking a more self regulatory approach.

Americans were reluctant to accept that different parts of hedge fund operations, such as asset valuation and governance, should be independent of one another, Borges said.

"Converging is not so easy," he said.

Source: Reuters

Obama fund plan more sizzle than steak

Angry investors may feel vindicated as President Barack Obama seeks to raise taxes on hedge fund and private equity fund profits, but critics caution the proposal will not raise significant money for years and may be watered down or fail to pass Congress.

Taxing "carried interest" has long been a hot-button issue in the $1.4 trillion (980 million pounds) hedge fund and $2.5 trillion private equity industries and it exploded on Thursday as Obama's new budget proposes raising about $24 billion over ten years by eliminating what has been called the "carried interest" tax loophole.

Carried interest, or carry, is the cut of profits -- typically 20 percent -- that private equity and hedge fund firms' partners keep as compensation.

For years, they have had to pay only the 15 percent long-term capital-gains tax rate on carry instead of the roughly 35 percent tax for ordinary income.

"There is a very strong argument to be made that the 20 percent (managers charge in performance fees) is real income but it is a moot point today because it will take the funds years to get back to their high water marks," said Cornelius Hurley, director of Boston University School of Law's Morin Centre for Banking and Financial Law.

Managers and industry experts note, with some irony, that the plan is being announced at a time these once high-flying fund firms are not earning much money and years before the proposal is set to take effect in 2011.

Facing tumbling financial markets, private equity funds have been making large writedowns on their portfolios, while many hedge funds suffer heavy losses. This means their managers are nowhere close to earning their lavish 20 percent performance fees.

"Proposing the plan now, creates more noise now than is probably necessary," Hurley said.  

NOT A DONE DEAL

Looking ahead to the day such a proposal might have real teeth, experts say that raising the carry would be a hit for private equity and hedge fund firms but would not kill the industry.

Steven Kaplan, a professor of finance specializing in private equity at the University of Chicago, said some private equity firms may in response try and raise the carry from the typical 20 percent to perhaps 25 percent.

"The second thing is smart lawyers will try to manoeuvre around this," Kaplan said. "There is a case that this is capital gains not ordinary income."

The Private Equity Council, an industry group, said it believed that profits generated by increasing the value of capital assets should continue to be treated as capital gains.

"We recognize that our country is facing enormous economic challenges," Douglas Lowenstein, PEC president, said in an emailed statement. "With more than $500 billion in new capital to invest, private equity partnerships can and will be part of the solution."

But even if still classed as capital gains tax, managers might have to pay more on carry anyway. The capital gains tax could revert back to 20 percent on January 1, 2011, unless lawmakers extend cuts that brought the rate down.

In addition, the proposal may not be approved by Congress.

"Hedge funds and private equity funds gave a lot of money to the Democratic party in the last election cycle," said Kaplan. "Why did they do that? Because they were hoping this wouldn't happen. There's an incentive from the part of the Democrats to threaten this but not pass it."

Some experts said it was included to capture the public's outrage that million-dollar fund managers squandered average Americans' nest eggs but pay lower taxes.

"Punishment is in the air," Hurley said, noting that many wealthy investors in hedge funds have not been able to access their money as redemptions have been suspended amid a flood of red ink at the funds.

Source: UK Reuters

New Hedge Fund Laws Proposed in Connecticut

By Bart Mallon

State to Increase Regulation of Hedge Funds

(www.hedgefundlawblog.com)  Connecticut, home of many of the biggest hedge funds in the world, may begin regulating hedge funds in a heavy handed manner.  Recently state lawmakers have introduced three bills (Raised Bill No. 953, Raised Bill No. 6477 and Raised Bill No. 6480) which would greatly increase oversight of hedge funds which have a presence in Connecticut.   This article provides an overview of the three raised bills and provides reprints the actual text of these bills.

Raised Bill No. 953

The largest of the three bills, No. 953 has the following central features:

• Definitions certain terms (including the term "Hedge Fund") which are used throughout the bill.
• Provides that, starting in 2011, hedge funds may not have individual investors  who do not have $2.5 million in "investment assets" (different than net worth)
• Provides that, starting in 2011, hedge funds may not have institutional investors who do not have $5 million in "investment assets"
• Provides that funds must disclose certain conflicts of interest of the manager
• Provides that funds must disclose the existence of side letters
• Requires an annual audit (beginning in 2010)

The above provisions would apply to those funds which have an office in Connecticut where employees regularly conduct business on behalf of the fund.   It is currently unclear whether there will be any sort of grandfathering provisions for those funds which currently have investors who do  not meet the "investment assets" threshold.   Another interesting part of the bill is that it defines a hedge fund with reference to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act.  The recently proposed Hedge Fund Transparency Act would actually eliminate these sections and add new Section 6(a)(6) and Section 6(a)(7).

Raised Bill No. 6477

The next bill is No. 6477 which would require hedge funds to be regulated by the Connecticut Banking Commission.  The bill requires hedge funds to purchase a $500 license issued by the Connecticut Banking Commissioner prior to conducting business in Connecticut.  The license would need to be purchased each year.  The bill also provides the Banking Commission with authority to adopt regulations.

This bill is interesting because it is fundamentally different from most hedge fund regulations which seek to regulate the management company through investment advisor registration.  This bill regulates the fund entity (as opposed to the management company) and does so through the power of the state to regulate banking.   Right now it looks like this bill will apply to all hedge funds, even those who do not utilize leverage.  It is not currently clear why or how the Banking Commission has jurisdiction non-banking private pools of capital, especially for those funds which do not utilize any sort of leverage.

It is also interesting to note that No. 6477 would apply regardless of the registration status of the fund's management company.  This means that a fund could be subject to SEC oversight and may also be subject to direct oversight by the Connecticut Department of Banking ("DOB"), which means the DOB could presumably conduct audits of the fund.  Of course, this could potentially greatly increase operational costs for hedge funds with an office in Connecticut.

Raised Bill No. 6480

The final bill is No. 6480 which would require Connecticut based hedge funds with Connecticut pension fund investors to disclose detailed portfolio information to such pension funds upon request.  It goes without saying that this bill is likely to receive a considerable amount of scrutiny from the Connecticut hedge fund community.

Conclusion

The hedge fund industry continues to be a major focus of both state and federal lawmakers who are anxious to start regulating these vehicles.  Unfortunately we are witnessing a patchwork approach to regulation where there is little communication between the states and the federal lawmakers.  If other states follow Connecticut's lead then we face the potential situation where funds in each state will need to follow state specific laws enacted by quick-to-legislate, out-of-touch lawmakers.   Efficiency in the securities markets is undercut by overlapping and unnecessary regulations - both managers and investors would be better served by a comprehensive effort to revise the securities laws at the federal and state levels.

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Raised Bill No. 953
January Session, 2009

Referred to Committee on Banks
Introduced by: (BA)

AN ACT CONCERNING HEDGE FUNDS.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2009) (a) As used in this section:

(1) "Hedge fund" means any investment company, as defined in Section 3(a)(1) of the Investment Company Act of 1940, located in this state (A) that claims an exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940; (B) whose offering of securities is exempt under the private offering safe harbor criteria in Rule 506 of Regulation D of the Securities Act; and (C) that meets any other criteria as may be established by the Banking Commissioner in regulations adopted under subsection (f) of this section. A hedge fund is located in this state if such fund has an office in Connecticut where employees regularly conduct business on behalf of the hedge fund;

(2) "Institutional investor" means an investor other than an individual investor including, but not limited to, a bank, savings and loan association, registered broker, dealer, investment company, licensed small business investment company, corporation or any other legal entity;

(3) "Investment assets" includes any security, real estate held for investment purposes, bank deposits, cash and cash equivalents, commodity interests held for investment purposes and such other forms of investment assets as may be established by the Banking Commissioner in regulations adopted under subsection (f) of this section;

(4) "Investor" means any holder of record of a class of equity security in a hedge fund;

(5) "Major litigation" means any legal proceeding in which the hedge fund is a party which if decided adversely against the hedge fund would require such fund to make material future expenditures or have a material adverse impact on the hedge fund's financial position;

(6) "Manager" means an individual located in this state who has direct and personal responsibility for the operation and management of a hedge fund; and

(7) "Material" means, with respect to future expenditures or adverse impact on the hedge fund's financial position, more than one per cent of the assets of the hedge fund.

(b) On or after January 1, 2011, no hedge fund shall consist of individual investors who, individually or jointly with a spouse, have less than two million five hundred thousand dollars in investment assets or institutional investors that have less than five million dollars in assets.

(c) The manager shall disclose to each investor or prospective investor in a hedge fund, not later than thirty days before any investment in the hedge fund, any financial or other interests the manager may have that conflict with or are likely to impair, the manager's duties and responsibilities to the fund or its investors.

(d) The manager shall disclose, in writing, to each investor in a hedge fund (1) any material change in the investment strategy and philosophy of the fund and the departure of any individual employed by such fund who exercises significant control over the investment strategy or operation of the fund, (2) the existence of any side letters provided to investors in the fund, and (3) any major litigation involving the fund or governmental investigation of the fund.

(e) On January 1, 2010, and annually thereafter, the manager shall disclose, in writing, to each investor in a hedge fund (1) the fee schedule to be paid by the hedge fund including, but not limited to, management fees, brokerage fees and trading fees, and (2) a financial statement indicating the investor's capital balance that has been audited by an independent auditing firm.

(f) The Banking Commissioner may adopt regulations, in accordance with chapter 54 of the general statutes, to implement the provisions of this section.\

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Raised Bill No. 6477
January Session, 2009

Referred to Committee on Banks
Introduced by: (BA)

AN ACT CONCERNING THE LICENSING OF HEDGE FUNDS AND PRIVATE CAPITAL FUNDS.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2009) (a) No person shall establish or conduct business in this state as a hedge fund or private capital fund without a license issued by the Banking Commissioner. Applicants for such license shall apply to the Department of Banking on forms prescribed by the commissioner. Each application shall be accompanied by a fee of five hundred dollars. Such license shall be valid for one year and may be renewed upon payment of a fee of five hundred dollars and in accordance with the regulations adopted pursuant to subsection (b) of this section.

(b) The Banking Commissioner shall adopt regulations in accordance with the provisions of chapter 54 of the general statutes for purposes of this section.

****

Raised Bill No. 6480
January Session, 2009

Referred to Committee on Banks
Introduced by: (BA)

AN ACT REQUIRING THE DISCLOSURE OF FINANCIAL INFORMATION TO PROSPECTIVE INVESTORS IN HEDGE FUNDS AND PRIVATE CAPITAL FUNDS.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2009) Any hedge fund or private capital fund that is (1) domiciled in the state, and (2) receiving money from pension funds domiciled in the state shall disclose to each prospective pension investor in such funds, upon request, financial information including, but not limited to, detailed portfolio information relative to the assets and liabilities of such funds.

Bart Mallon is a securities attorney with a significant hedge fund formation practice.  Mr. Mallon writes extensively about starting a hedge fund and the new forex registration requirements.

Private equity aims to appease with code

The European private equity industry will propose on Thursday a unified code of conduct to the European Commission, however it will stop short of offering compulsory rules binding the entire industry.

As the economic downturn across Europe pushes companies to the brink of bankruptcy, private equity firms have come under intense scrutiny for their use of leverage. Critics, including the Party of European Socialists, have called for stringent regulation of their activities.

Jonathan Russell, chairman of the European Private Equity and Venture Capital Association EVCA.L, as well as head of buyouts at British listed private equity firm 3i Group Plc, told Reuters the industry recognised the concern expressed and must address it.

"It is not an option just to ignore it," he said.

In a 300-page submission to the Commission, the industry seeks to distinguish itself from other alternative asset classes, including hedge funds, as well as drawing clear lines between venture/growth capital and buy-outs.

It also states that the private equity business model does not pose a systemic risk to the European economy.

It argues that the industry, which manages some $2.5 trillion (1.75 trillion pounds) of assets globally, is already highly regulated at a national level and that it has a big contribution to make to the economic recovery of the region.

PENAL CODE

While the industry stopped short of offering a full compulsory code, Russell said non-compliance with an industry framework would be very damaging to a private equity firm's franchise.

"To be non-compliant would be penal," he said.

Critics are calling for regulation to include limits on leverage, minimum capital levels for leveraged buyouts (LBOs) and registration and authorisation of management companies and fund managers. And Russell said the industry was ready to sit down with the authorities to work out the best way to implement and enforce any regulation.

In its submission, the private equity industry also offered to introduce a supervisory body to oversee enforcement of the professional standards, which would in turn be accountable at both a national and EU level.

It proposed to complete the unified industry code and the enforcement regime within a year.

"The worst outcome would be some sort of regulation that hasn't been thought through, that has unintended consequences, that doesn't deliver what stakeholders and policy-makers want ultimately and hampers an industry that has a lot to add," said Russell.

Source: Uk Reuters

Banks Will Cut Proprietary Trading Under FSA Rules

The leaders of Britain’s market regulator told a parliamentary select committee that “revolutionary” changes in U.K. financial regulations will lead to significantly less proprietary trading by banks.

The Financial Services Authority will tell financial firms what products to sell, not just how to sell them, as part of an overhaul of regulatory structure that isn’t currently “fit for purpose,” FSA Chief Executive Officer Hector Sants and Chairman Adair Turner told the Treasury Select Committee yesterday. Turner said there will be a revolution in regulation, including questioning of firms’ business strategies and of markets.

The FSA’s past approach was “a philosophy that was in retrospect mistaken,” Turner said at the hearing in London. “There was an expression on both sides” of the political spectrum “in terms of regulation to keep things light.”

The FSA had to defend its role in failing to prevent the financial crisis, which Turner said yesterday is “the worst commercial banking crisis ever known.” The select committee previously criticized the FSA for “systematically failing” in its supervision of Northern Rock Plc, the first British casualty of the credit crisis.

Turner told the committee that it wasn’t the prevailing wisdom before the crisis for the FSA to become involved in lenders’ business models. The FSA would have met with criticism had it tried to do so, he said.

‘Downsizing’

“If in 2004, the FSA had started aggressively telling mortgage lenders to cut back lending, I suspect the predominant reaction would have been to tell us we shouldn’t be holding back mortgage credit to ordinary people,” he said.

Separately today, the FSA released a new code on pay policies for financial services companies that says remuneration levels should be consistent with “sound risk management.”

While Turner yesterday stopped short of calling for a formal separation of proprietary trading from traditional lending and deposit-taking at banks, one result of tighter controls would be a “significant downsizing of proprietary trading,” he said.

The FSA will also make banks keep “several times” more capital against their trading book in the future, he said.

Proprietary trading is when a bank or financial institution trades securities and other financial instruments with its own money rather than for its customers.

The FSA took its first step yesterday in becoming a “product” regulator, when it told lenders to stop selling a form of payment-protection insurance because it doesn’t think customers get a fair deal.

Hedge Funds

Hedge funds too may have to conform to rules about how much capital they should hold and about the liquidity of the assets they hold if they are proven to be a risk to the general economy if they fail, Sants said. The FSA has said previously that it wants to gather information to understand the risk that hedge funds pose.

Turner repeated comments that the current system of having different domestic regulators across Europe while banks operate across borders has to change.

His comments came after a group of advisers led by Jacques de Larosiere, the former head of the Bank of France, yesterday called for new Europe-wide agencies to coordinate oversight of financial companies and to watch over economic risks.

“I don’t think we can run a European single market in retail banking without significant changes in the regime,” Turner told the committee yesterday.

The FSA said it published a draft code of practice on remuneration policies for the companies it regulates. The code is to ensure that firms have remuneration policies that are consistent with sound risk management. Specific remuneration levels should be set by boards and shareholders, agency said in a statement today.

Source: Bloomberg

A Look at Connecticut's Proposed Hedge Fund Regulations

According to the Hartford Business Journal, about 9.5 percent of theworld's hedge fund assets are located in Greenwich, Stamford, and Westport, Conn., so it's a big deal when state legislators propose three bills regulating the funds and demanding increased transparency from fund managers. We called partner John Brunjes for details. Brunjes advises dozens of funds and fund investors, and he's scheduled to testify before the state Senate about the proposed bills on Friday. He took us through their provisions, their potential impact on the state and the role of lawyers in the debate. 

Hi, John. The proposal getting lots of attention right now would ban investors with less than $2.5 million in assets or institutions with less than $5 million from investing in hedge funds. How big a change would that be? What are the current rules?

Right now, a fund can only offer securities to an accredited investor--a person with an income of at least $200,000 or $300,000 per year when combined with a spouse. That's been the standard since 1982, when making $200,000 really meant something.

You can't actually invest in a fund unless you can prove you are a qualified client--someone with at least $750,000 under management with an investment adviser or at least $1.5 million of net worth to invest. There are higher standards beyond that. 

Part of the reason for this (proposal) is the notion that there has been a retailization of hedge fund products. This bill is aimed at combating that. 

There are all sorts of disclosure requirements here, including the disclosure of any "side notes" the funds write to investors. What exactly are those?

Funds want every investor to take the same deal. Now, there are some marquee investors or institutions that you might really want to have in your funds, and they may want to pay a 1.5 percent management fee instead of 2 percent, and they may not want to wait 90 days to get a redemption request honored. So you may make a side agreement with those investors, and that side note is normally not disclosed to the other investors. 

One proposal calls for the disclosure of all fees--management fees, performance fees, brokerage fees and a financial statement audited by an independent firm. How big of a deal is this? Do fund managers never disclose this stuff?

Well, these are privately negotiated contracts with investors. If you don't demand an annual report or an annual audit, the management of a hedge fund doesn't have to do that. This would provide a much higher level of transparency. 

Are these regulations really so bad that funds will leave the state?

I think the Connecticut legislature is keenly aware that this is a highly competitive business and that these funds do not have heavy infrastructure that they need to close up if they need to pack and move. They are a substantial revenue generator for the state and we should be doing everything to enhance their ability to conduct business here.

So are you getting inundated with calls from hedge fund clients?

I wouldn't say inundated. These bills have attracted a fair amount of attention from the Connecticut investment community, both from fund managers and investors. We represent both groups.

Is there a particular provision among all these that is just universally unacceptable to fund managers.

I'm not going to comment on that for now. I do have to testify before the state Senate on Friday, but that testimony will mostly be informational. 

Source: AM Law Daily

SEC Obtains Emergency Asset Freeze To Halt $30 Million "Fund Of Funds" Investment Scheme

The Securities and Exchange Commission today charged Mark Bloom and his firm North Hills Management LLC with securities fraud, and obtained an emergency court order to freeze their assets and halt an alleged investment scheme involving the marketing of a "fund of funds" investment vehicle.

According to the SEC's complaint, filed in federal court in Manhattan, the SEC alleges that Bloom, through North Hills, raised approximately $30 million from 40 to 50 investors between 2001 and 2007 by representing that the assets would be invested in a diverse group of hedge funds. Instead, Bloom misappropriated more than $13.2 million of investor funds to furnish a lavish lifestyle that included the purchase of luxury homes, cars and boats for himself and his wife, who is named as a relief defendant. The remaining funds were invested in a single fund which itself turned out to be fraudulent.

Scott Friestad, Deputy Director of the SEC's Division of Enforcement, said, "We allege a blatant investment scheme, and today's action shows that the Commission will act decisively to preserve assets for investors."

James Clarkson, Acting Director of the SEC's New York Regional Office, added, "As today's emergency action demonstrates, the SEC will bring aggressive enforcement action against individuals who defraud innocent investors."

The SEC alleges that the defendants solicited investments in North Hills, L.P. (the "Fund"), which is named as a relief defendant, by making misleading representations. Bloom and North Hills represented that the Fund's assets would be allocated across multiple funds and fund managers to ensure diversification and moderate risk. They sent investors false monthly account statements that portrayed their investments as profitable when, in reality, Bloom was systematically looting the Fund's trading account by making "loans" to himself and by investing in contravention of the Fund's stated investment strategy in an investment known as the Philadelphia Alternative Asset Fund (PAAF). Bloom received undisclosed commissions from PAAF in excess of $355,000 over a 16-month period. PAAF itself was uncovered as a fraudulent scheme in June 2005.

According to the SEC's complaint, beginning in November 2007, one of the Fund's largest investors, a charitable trust (the "Trust") that funds children's schools began to serve Bloom with redemption requests, which Bloom repeatedly evaded. To date, Bloom has failed to honor the Trust's redemption requests in full and claims that he does not have the means to do so. The Trust is owed more than $9.5 million on its investment.

The SEC complaint charges violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

Judge John G. Koeltl of the U.S. District Court for the Southern District of New York, entered an order temporarily restraining the defendants, freezing their assets, ordering accountings, and approving the appointment of a receiver. The SEC's complaint also seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorge ill-gotten gains with prejudgment interest.

The U.S. Attorney's Office (USAO) for the Southern District of New York announced parallel criminal charges against Bloom earlier today, and the U.S. Commodity Futures Trading Commission (CFTC) filed related charges against Bloom and North Hills.

The SEC's investigation is ongoing. The Commission acknowledges the assistance and cooperation of the USAO, the Federal Bureau of Investigation, the CFTC and the National Futures Association.

Source: Mondo Visione

Private equity may face stricter regulations

As hedge funds come under increasing regulations, analysts believe the next industry to face tighter and stricter rules could be private equity.

Private equity has largely been outside the pale of regulators but this could change in the future.

According to Erik Hirsch, Chief Investment Officer at Hamilton Lane, "it is hard to believe you can have an asset class as large as this and not have someone make it a bit more regulated".

On a regional level, experts opine that the industry could face more regulations.

"It has already started happening in Egypt," said Alaa El Din Rady, co-founder and Managing Director of Enmaa Financial Services, an Egypt-based financial services and consulting firm specialising in mid-market acquisition and divestiture advisory services across the Middle East and North Africa (Mena) region.

"The government took a decision to limit the amount of money any private equity fund can borrow to finance an LBO (banks can only lend a maximum of five per cent of their loan portfolio at the time of lending) for financing acquisitions. Of this amount, credit extended to any one individual and related parties cannot exceed 20 per cent," he said.

"The government took another decision regarding valuations accepted by banks. If a company has intangible/ goodwill above its book value, this goodwill is fully integrated if the owner is a strategic but only half of it is integrated in the price if the owner is a private equity fund," he said.

"Private equity is often seen as being unregulated in the West. Discussions relating to the regulation of this alternative asset have generated debates of unprecedented scale," said Rami Bazzi, Senior Executive Officer, Injazat Capital Limited.

In the region, however, Bazzi sees private equity managers indirectly but closely regulated.

"A fund can take the form of many investment vehicles. Under the DFSA, for example, the investment manager operating and managing a collective investment sch-eme is monitored and regulated," he said.

"In the same way, there are a number of fund structures in Bahrain regulated in varying degrees by its central bank. The region has also witnessed the rise of Shariah-compliant funds, which are governed by Shariah's own set of requirements. These offer a disciplined framework as well.

"In addition, international standards for transparency and valuation are expected to become an integral part of the industry as more international players are focusing on the region and regional private equity managers are acknowledging the merits of industry best practices."

"We expect to see more funds and collective investment schemes being structured along the Shariah framework and in co-operation with DIFC and other financial centres because of the international standards they instill and consequently the confidence they offer to investors," Bazzi added.

 Source: Emirates Business

Pair Lived Large on Fraud, U.S. Says

In the latest round of financial-fraud allegations to erupt, two money managers have been accused of misappropriating at least $553 million, and using it to fund a lifestyle of lavish homes, horses and even an $80,000 collectible teddy bear.

Associated Press

Paul Greenwood, 61, exits Manhattan Federal court after being released on bail Wednesday in New York.

The two men, Paul Greenwood, 61 years old, of North Salem, N.Y., and Stephen Walsh, 64, of Sands Point, N.Y., were arrested by Federal Bureau of Investigation agents and face criminal charges of conspiracy, securities fraud and wire fraud by the U.S. Attorney for the Southern District of New York.

Alleged victims include Carnegie Mellon University, which had invested more than $49 million, and the University of Pittsburgh, which put in more than $65 million, court records show. The Iowa Public Employees Retirement System said it had invested about $339 million, or 2% of its portfolio. The Sacramento County Employees' Retirement System in California said on its Web site that it had invested $89.9 million, or 1.6% of its total fund.

Series of Scandals

The case marks the latest in a series of scandals, topped by Bernard Madoff, who authorities say admitted in December to masterminding a $50 billion Ponzi scheme. Other cases include R. Allen Stanford, a Texas financier who has been accused by the Securities and Exchange Commission of an $8 billion fraud involving certificates of deposit, and Marc Dreier, a prominent New York lawyer charged in an alleged $400 million hedge-fund scam.

If proved, the latest case "will be the biggest direct hedge-fund fraud we've seen," according to Chris Addy of Montreal-based Castle Hall Alternatives, which provides risk-assessment services for investors in hedge funds.

Separately, another alleged fraud began unfolding Wednesday when the U.S. attorney charged hedge-fund manager James Nicholson with securities and bank fraud in U.S. District Court in Manhattan. Prosecutors don't have a clear idea of the size of the alleged loss, saying only that as much as $900 million could have been invested with his firm.

Mr. Nicholson's lawyer, Ira Lee Sorkin, declined to comment Wednesday.

'Enhanced Stock Indexing'

Federal prosecutors allege that since 1996, Messrs. Greenwood and Walsh ran a fraudulent investment-advisory scheme, involving several companies, in which they promised to invest funds in a program called "enhanced stock indexing." It was represented as a conservative trading strategy that had outperformed the Standard & Poor's 500 Index for more than 10 years. Prosecutors allege the men raised more than $668 million from institutional clients, and misappropriated most of the money.

Court documents list several companies as being controlled by the two men, including WG Trading Co. and WG Trading Investors LP in Greenwich, Conn., and Westridge Capital Management Inc., based in Santa Barbara, Calif. They owned Westridge with another individual, prosecutors say.

Mr. Greenwood was elected supervisor (the rough equivalent of mayor) of North Salem, N.Y., a bucolic town north of New York City, in 2007.

Westridge is structured like a hedge fund in that it raised money from big institutional clients, pooled the funds, and charged fees based on asset size and profits.

A third man, Mark Bloom, of New York City, was separately charged by the U.S. attorney's office, in U.S. District Court in New York, with securities fraud and wire fraud for allegedly defrauding investors in North Hills Fund, an investment partnership he started, and operated separately, while working at WG Trading Co.

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Stephen Walsh of WG Trading Co., a broker- dealer based in Greenwich, Conn., leaves Federal Court in Lower Manhattan on Wednesday.

Attorneys for Messrs. Greenwood and Walsh declined to comment. An attorney for Mr. Bloom declined to comment.

Messrs. Walsh and Greenwood were released on $7 million bail each. Mr. Bloom was released on $3 million bail.

The two universities, Carnegie Mellon and Pitt, filed a civil lawsuit last week against Messrs. Greenwood and Walsh, and several of the companies allegedly affiliated with them, seeking an asset freeze. According to the lawsuit, filed in U.S. District Court in Pittsburgh, the schools grew concerned after learning that the National Futures Association, an industry self-regulatory association, on Feb. 12 had suspended the two men from NFA membership and had prohibited them from soliciting new investments. Earlier this month, the two men "failed to cooperate with NFA and produce books and records" during an audit by the NFA, according to documents filed in the case.

The NFA's audit of Messrs. Greenwood and Walsh's firm "started the dominoes falling," an association spokesman said.

According to the lawsuit, on Feb. 15, two senior Carnegie Mellon executives called James Carder, president of Westridge Capital. Mr. Carder told the two men that he "was 'devastated' by the apparent actions of Greenwood and Walsh, and their refusal to cooperate with the NFA," the lawsuit alleges. Mr. Carder "went on to say that his 'career is over,'" these documents say.

A person who answered the phone Wednesday at Westridge's office in Santa Barbara declined to provide his name and said no one at the firm, including Mr. Carder, would comment.

The two universities had no comment Wednesday.

Donna M. Mueller, chief executive of the Iowa pension fund, said: "This is an indication that regulators moved quickly to address suspicions and are acting on our behalf."

SEC, CFTC Charges

Messrs. Greenwood and Walsh also face civil charges from the SEC and the Commodity Futures Trading Commission, which became involved in the case because it regulates futures markets. The alleged fraud involved trading in financial futures pegged to stock indexes.

In its civil complaint, the SEC alleges that Messrs. Walsh and Greenwood used client funds from WG Trading Investors as "their personal piggy-bank to furnish lavish and luxurious lifestyles, which include the purchase of multimillion-dollar homes, a horse farm, cars, horses, and rare collectibles such as Steiff teddy bears."

Grand Central Inc.

Authorities claim Paul Greenwood and associate Stephen Walsh spent lavishly on horses, houses and collectible teddy bears. Mr. Greenwood's horse farm boasts show ponies that can fetch more than $100,000, according to his Web site.

The CFTC said more than $160 million was used for their personal expenses, including rare books and a $3 million home for Mr. Walsh's ex-wife.

An article about Mr. Greenwood on the North Salem Bridle Trails Association Web site describes him as a former economics professor who wrote a dissertation on stock-portfolio theory. The article said he had bought Old Salem Farm from the actor Paul Newman, and later sold his interest in it. A New York Times article in 1989 described the farm, then owned by Mr. Greenwood, as "the grandest stable for show horses" in Westchester County.

The SEC described the alleged fraud as "ongoing." As recently as Feb. 6, the defendants obtained a $21 million investment from a large state educational institution that was a client, the SEC's complaint said.

Twenty Accounts

Westridge Capital managed $1.8 billion in assets, the firm told the SEC in an adviser-registration filing in January. It oversaw a total of 20 accounts primarily for institutions including pension funds, charitable foundations and hedge funds, according to the filing. It lists Messrs. Walsh and Greenwood as principals since 1999.

WG Trading Co. reported consistently positive returns, according to hedgefund.net, a provider of fund data to investors. From January 1995 to September 2008, WG Trading never reported a negative month. Typically it gained from to 0.10% to 1% a month during that time, as part of a low-risk strategy designed to outperform major market indexes. The firm charged a management fee of 0.25% of assets it managed plus 30% of any trading profits, a higher percentage than the 20% typical of most hedge funds.

Source: The Wall Street Journal

Aima throws support behind hedge fund transparency

The Alternative Investment Management Association (Aima) has declared its support for the principle of full transparency in the hedge fund market, in an attempt dispel the view that the industry is "opaque and uncooperative".

Furthermore, the association is representing the global hedge fund industry in the on-going international discussions about the future regulatory framework for the industry, notably with the organisations tasked by the G20 to address the issue, such as IOSCO and the Financial Stability Forum.

Andrew Baker, chief executive of Aima, said: "We want to dispel once and for all this misconception that the hedge fund industry is opaque and uncooperative.

"That's why we are declaring our support for the principle of full transparency of systemically significant positions and risk exposures by hedge fund managers to their national regulators through a regular reporting framework.

"We are confident that our members recognise that it is in everyone’s best interests if we cooperate fully in the important on-going international efforts to examine and improve the supervisory framework of the future."

Furthermore, the association is representing the global hedge fund industry in the on-going international discussions about the future regulatory framework for the industry, notably with the organisations tasked by the G20 to address the issue, such as IOSCO and the Financial Stability Forum.

Andrew Baker, chief executive of Aima, said: "We want to dispel once and for all this misconception that the hedge fund industry is opaque and uncooperative.

"That's why we are declaring our support for the principle of full transparency of systemically significant positions and risk exposures by hedge fund managers to their national regulators through a regular reporting framework.

"We are confident that our members recognise that it is in everyone’s best interests if we cooperate fully in the important on-going international efforts to examine and improve the supervisory framework of the future."

Source: The Financial Times