A divided Connecticut General Assembly cracked open the Pandora”™s Box of the local hedge fund industry before slamming it shut again, with the state House of Representatives voting down a bill to force funds to reveal any conflicts of interest they have to investors, which had been approved by the state Senate.
While the deliberations would have imposed little burden on hedge funds, it nevertheless set a precedent in Connecticut showing the resolve in the state Senate to place limitations on the industry that has flourished in Fairfield County.
While several local hedge funds have announced plans to shut down in the aftermath of the Wall Street collapse ”“ most notably Westport-based Pequot Capital Management last week ”“ Connecticut still placed seven funds last month on Barron”™s list of the best-performing hedge funds in the world, based on three-year annualized returns.
An equity fund at Greenwich-based Shumway Capital ranked 11th on the list with a 28.7 percent annualized return; by comparison, the Standard & Poor”™s 500 index had a -8.3 percent return over the same stretch, while the BarclayHedge Fund Index finished the year at -1.0 percent.
In all, seven Fairfield County funds made the Barron”™s list. At 17th was an international equity fund by Stamford-based SAC Capital Advisors L.L.C., which had a 24.2 percent overall return over three years despite an 18.5 percent drop last year. Just missing the top 30 were Norwalk-based Graham Capital and Westport-based Moore Capital, which had funds that delivered roughly a 19 percent return over three years.
Despite the continuing impact on the state economy, the Connecticut General Assembly has been considering three bills to potentially regulate hedge funds this year in a bid to better protect investors in the wake of a mini pandemic of investment scams that have surfaced as investors have clawed back their money from various firms.
“There was a time when I advocated hedge-fund regulation and said that hedge funds are in a regulatory black hole,” said Attorney General Richard Blumenthal, testifying before a banking committee earlier this year. “Many people said to me, ”˜We don”™t really need to do anything for these investors. They”™re by nature smart and sophisticated. They can fend for themselves. They can protect their own financial wellbeing.”™
“If we”™ve learned nothing else in the last six months ”“ speaking not only about Madoff and Stanford and the Ponzi schemes and financial frauds but about the day-to-day hedge fund losses, the hedge funds going out of existence because of financial failure ”“ we have learned that those so-called smart and sophisticated investors are maybe not as smart and sophisticated as they thought they were,” Blumenthal continued. “They can have an impact well beyond their own investments, because the failures of these hedge funds that do so much trading and control so many assets has a ripple effect on our entire economic well-being.”
While the 1998 collapse of Greenwich-based Long Term Capital Management had global economic consequences, the Managed Funds Association noted last month before a U.S. House of Representatives subcommittee that the current crisis was largely the making of the highly regulated banking industry.
“Hedge funds overall were and remain substantially less leveraged than banks and brokers, performed significantly better than the overall market and have not required, nor sought, federal assistance despite the fact that our industry, and our investors, have suffered mightily as a result of the instability in our financial system and the broader economic downturn,” said Richard Baker, CEO of MFA. “The losses suffered by hedge funds and their investors did not pose a threat to our capital markets or the financial system.”
In 2006 and 2007, the Managed Funds Association testified against bills in Connecticut that would have imposed disclosure requirements on hedge funds that the Washington, D.C.-based organization said would have been burdensome. MFA has also fought state-level regulation in New York, New Jersey and California.
Nevertheless, MFA said it supported a Congressional proposal to mandate the registration of hedge funds and other alternative investment companies with the Securities and Exchange Commission. While just over half of hedge funds are already registered with the SEC, the rule would open remaining funds to periodic examinations by the commission. The rules would also force funds to appoint a chief compliance officer, create a written code of ethics and disclose business details such as investment strategies, compensation, and the education and business background of key investment staff.
