LONDON (Reuters) - Some European hedge fund managers are turning their backs on the U.S. market to avoid registration rules due to come into force from next February, a top industry official told the Reuters Hedge Fund Summit on Thursday.
The rules, being introduced by the Securities and Exchange Commission, require funds larger than $25 million and with more than 15 investors to file as registered investment advisors.
They will affect funds with a “lock up” of under two years and require the appointment of chief compliance officers.
Laurence O’Connell, chief operating officer of MAN Investments (EMG.L), the world’s biggest fund-of-funds hedge fund, said the registration rule is being seen as an ill-conceived public policy and will reduce investor choice.
“It’s injurious to investors. Their optionality in the hedge fund sector is reduced and that is unacceptable,” he told the Summit, held at Reuters offices in London.
European managers, to some extent, are not taking any more money from U.S. investors, saying the new rules do not make it worth the effort, O’Connell said. “The more mature managers are imposing lockups to get around the rule.”
Investors are being asked to tie up their money for two years or longer, whereas typically hedge funds ask for a three-month to one-year lockup.
“It does not make very much difference to us at all. We are thinking about the investors here,” O’Connell said, adding that he expected the SEC to review the rule later on.
Even though many of the funds are domiciled outside the United States, the new rule will still effectively oblige them to register with the SEC — entailing regular visits from SEC officials and increasing the costs of compliance.
Gavin Rankin, head of investment analysis and product management at Citigroup Private Bank, said people at the margin of the hedge fund industry were thinking about moving away from the United States. “But it’s difficult to see how that rule will play out. There is still uncertainty over it.”
Alexis de Mones, global product specialist at ABN AMRO Asset Management, said the new rules would limit fraud because of the background checks by the SEC. “But it does not mean that the blow-ups are going to be smaller or further apart,” he said.
The rule was spearheaded by outgoing SEC Chairman William Donaldson, whose term ends on June 30, and could be altered under the leadership of Christopher Cox, President Bush’s nominee to head the SEC.
While hedge fund managers have complained about the cost of complying with the new Federal rules, some said the industry should learn to live with them.
Meanwhile, Asian regulators are yet to show any signs of being ready to impose heavy new rules on the industry and are learning rapidly about the market role of hedge funds, Chris Palmer, senior investment manager at Gartmore Investment Management, told the Summit.
“I don’t see any evidence that hedge fund managers in Asia are singled out any differently,” Palmer said. “Hong Kong and Singapore have made good progress over the last couple of years in encouraging growth of the hedge funds industry.”
Hedge funds played a role in reviving Asian markets by their willingness to step in to provide liquidity, he added.
Most major emerging markets, apart from Russia in practice, have introduced instruments to allow hedge funds to pursue strategies that include selling a stock short, Palmer said.