Regulators homing in on hedge funds

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A new approach focusing on how hedge fund managers treat their investors is being trialled by regulators in the US.

Overseeing and policing the hedge fund industry, which is worth a staggering $3 trillion, has never been easy and this new approach follows a series of investigations into how hedge funds respond to investors.

Focusing specifically on the manner in which these funds value their holdings and what happens when an investor happens to ask for their money to be returned, the new approach has been receiving lots of attention.

This issue used to be low down on the Securities and Exchange Commission's (SEC) priority list, a number of who saw hedge funds and the rich investors that dealt with them as items that didn't require much attention. However, this is starting to change. A number of insider-trading probes that have been through the courts and have captured the attention of regulators for the first time. Regulators were also given a sneak peak of the truth about hedge funds due to the Dodd-Frank financial overhaul, and they felt that new insider information was too valuable not to take advantage of.

Among the investigations currently being carried out into the way, hedge funds treat their investors is linked to hedge-fund
firm RD Legal Capital LLC. The issue of whether the firm "artificially marked up obscure investments in proceeds from a judgement against Iran in a terrorism suit," reported the Wall Street Journal.

The newspaper also reported a further enquiry, which was examining a hedge fund by the name of Platinum Partners LP, which focuses on rare investments. The SEC is said to be looking into the firm's “related-party transactions,” which could lead to conflicts of interest that should be being made public in an official manner. Other issues at stake with Platinum was the firm's auditing and record keeping, as well as its compliance methods. Recent behaviour by the hedge fund firm that was of concern to regulators was its communications to investors regarding them being unable to take all of their investments from one of its funds.

According to SEC enforcement director, Andrew Ceresney, the body is interested in looking at "all types of misconduct by hedge-fund managers." "Valuation is one of the core issues," he added.

Regulators are increasingly being drawn towards larger firms due to the growing focus on the hedge fund arena, despite only bringing cases in the past against smaller firms. One of the larger firms currently under the SEC microscope is the health-care-linked hedge fund firm, Visium Asset Management LP, which is being looked at for possible insider trading issues.

Hedge fund managers have long been given a wide berth by regulators in order to work out what the majority of their underlying investments' value could be. As hedge fund managers divide their assets into three categories, from Level 1 to Level 3 and ranging from stocks to complex loans, these have often flown under the radar of investigators and regulators. However, increasing scrutiny is now starting to be applied by regulators due in part to the fact that certain private investments across arenas including fixed income and technology startups have not performed well against a backdrop of economic turbulence.

One prime example of practices that have pricked investigators' ears was the 2015 case brought by The Canadian Public Sector Pension Investment Board against Saba Capital Management LP. The board alleged that the hedge fund firm underpaid it when it came time to redeem its investment. Saba lowered the value of a number of corporate bonds, said the pension board, before marking them up once more following the payment of the redemption request. The case is ongoing and Saba Capital Management LP denies all accusations against it, saying that all of the valuations being used were signed off by both the legal sector and auditors.

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