January 21, 2007 / 6:55 AM / 12 years ago

Massachusetts probes UBS hedge fund "hotel"

NEW YORK, Jan 2 (Reuters) - Massachusetts Secretary of State William Galvin has subpoenaed UBS UBSN.VX over whether its Boston “hedge fund hotel” charges fees that may create conflicts of interest and harm investors, a spokesman said on Tuesday.

UBS and other banks lease space to start-up hedge funds and provide receptionists and other support, with hopes that in time these funds will grow into bigger, lucrative customers.

But Galvin, who oversees banks and brokerages operating in Massachusetts, is concerned that funds may be paying inflated trading fees to help pay for the office space. Moreover these “soft dollar” costs are not disclosed to their investors.

“The secretary is looking into the matter of hedge fund hotels and the potential for conflicts of interest,” spokesman Brian McNiff said. “The investigation into UBS practices is going on and is preliminary at this point.”

McNiff added that some investors are unaware of the arrangements between banks and hedge funds, though inflated costs can drag on returns.

Hedge funds have been a gold mine for investment banks in recent years, generating a third of equities-trading commissions. Goldman Sachs (GS.N) and Morgan Stanley (MS.N) dominate the prime brokerage business, executing trades and lending securities, though UBS and other banks are expanding.

UBS, which declined comment, manages some 400,000 square feet of property in several cities.

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