Hedge Funds Face New Disclosure Obligations


The Securities and Exchange Commission has unanimously approved regulations designed to provide regulators with better information about hedge funds’ leverage, investments, valuation and trading practices in order to help policy makers better manage the systemic risk to the whole financial sector posed by hedge funds. But some, like AFL-CIO president Richard Trumpka think it falls short and more disclosures are needed. “The fact that opaque, highly leveraged pools of capital – – or ‘shadow banks’ – – can pose systemic threats is well acknowledged,” Trumpka was quoted as saying.

The SEC rules provide for quarterly reports with staggered reporting dates with the largest hedge funds (those with more than $5 billion) going first. The Commodities Futures Trading Commission (CFTC) is expected to vote on its rules very soon. Some hedge fund managers are upset over having to provide disclosures to two regulators in two different formats. The largest asset management firm, BlackRock Inc., and others have pushed the SEC and CFTC to standardize reporting forms. SEC chief Mary Shapiro has explained that the SEC and CFTC will try to coordinate “but there are unique areas where each of us has interests.”

Hedge funds now manage $2.04 trillion, the most money they have ever managed. Despite claims to the contrary, they are often highly correlated with stock market risk. Hedge funds lost $85 billion in the third quarter, the worst quarterly performance since the fourth quarter of 2008 and the fourth worst ever, according to CNNMoney. Hedge funds were down 19.03% in 2008, up 19.98% in 2009, up 10.25 in 2010, down 5.44 so far this year. With all that volatility, investors (if they rode it all out) have a net 5.76% gain since 2008, which is 1.54% per year. Investors would have been better off buying a 10-year treasury bill yielding 3.66% per year in 2008.

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