In his new colum Bloomberg regular John Wasik shares his doubts regarding the effectiveness of the SEC's upcoming regulation of hedge funds. Wasik's conclusion? To avoid putting your money in the hands of the next Bayou Management, seek outside assistance from your financial advisor and corporate private eyes:

Regulators May Never Police Hedge Fund Conflicts

By John Wasik
November 28, 2005
Bloomberg

The U.S. Securities and Exchange Commission is trying hard not to look like the bumbling film detective Inspector Clouseau in advance of its hedge-fund registration deadline in February. Already managers of the 8,000 funds that control $1 trillion in assets have found ways of avoiding registration. And it's unlikely the agency's inspection of the advisers will be too extensive, either.

As with many other investment products, you will have to be your own cop to ferret out conflicts at hedge funds and funds of funds, which package several hedge products. "Conflicts of interest -- they're everywhere,'' said Gene Gohlke, associate director of the SEC's Office of Compliance Inspection, who was speaking at a Fund of Funds Forum in New York on Nov. 14. "And they're particularly prevalent in the investment advisory business.''

The SEC is being honest about its inability to adequately supervise a huge, growing and sometimes unruly industry... The agency will only be able to conduct 1,200 to 1,500 inspections a year with 450 staff members. This team also tries to monitor 8,000 mutual funds from 1,000 fund groups... The odds are against the SEC collaring the next Bayou Capital, a $440 million hedge fund that collapsed in August and is under investigation for fraud...

You needn't be discouraged by the regulatory gap and can hire someone to be your watchdog... Hiring someone like an accountant, lawyer or financial planner to vet funds or funds of funds for you makes eminent sense... Some oversight of hedge funds is better than none, although the way the system is now, you will have much better protection if you do it yourself or hire someone akin to a private eye.

Indeed. Much more of interest in the full piece, regarding the February '06 hedge fund SEC filing deadline and the hurdles that still remain for the SEC before it can perform an adequate job in policing funds.

-- MDT

Labels: Bayou Group