SEC To Crack Down On “Excessive” Hedge Fund Expenses

Hedge funders have a bit of an "image" issue on main street where their behavior is often viewed as "excessive".  Not to put words in anyone's mouth but we think phrases like "arrogant," "self-obsessed," and "detached from reality" have been tossed around.  Frankly we're not sure what they're talking about.

Hedge Fund Party

But, apparently the SEC is starting to take notice with plans to crack down on hedge fund and private equity expense reimbursements

We're all aware that hedge fund and private equity fees, equal to 2% of assets plus 20% of profits, are obscene, particularly in light of the inconvenient fact that a substantial portion of them consistently under-perform broader markets.  But what get less attention is how other "perks" are billed through to clients to boost fees even more.  These perks can include a variety of things like private jet charters, lavish hotel stays, and week-long conferences at exotic beach resorts.  Or it could be the private equity manager that sets up ancillary service firms, like a headhunting agency for example, and then pushes all hiring activities of portfolio companies through that internally owned entity rather than larger more established agencies…sure we see no conflict there.

According to the Wall Street Journal, the SEC is taking notice of these fees and plans to scrutinize them more in the future.

The Securities and Exchange Commission is closely scrutinizing the fees and expenses, including travel and entertainment, that hedge funds and private-equity firms charge to their investors.

As part of the Dodd-Frank financial law, the SEC now oversees more than 1,500 additional such advisers that were required to register with the agency. In that capacity, the SEC is checking to ensure they are charging their investors reasonable expenses.

"Exotic" expenses like travel, entertainment and consulting arrangements are more likely to attract the agency's attention than routine charges like legal and accounting fees, say compliance consultants who advise funds on registration and reporting requirements.

 

Firms may be asked questions such as why they used a private jet or flew first class, when investors were paying for that expense, he said.

 

The scrutiny comes as part of the SEC's new "presence exam" initiative for the firms now falling under the agency's regulatory umbrella. The program began last fall and is projected to last for two years. During the exams, SEC staff members choose one or two areas, such as conflicts of interest or portfolio management, and examine the books and records of the newly-registered adviser.

 

There aren't specific regulations about what qualifies as expenses that should be charged to the investors or paid by the adviser, but advisers do have a fiduciary duty to act in their clients' best interest. Typically, in addition to management and performance fees, investors also will pay for legal and accounting charges.

We would think it wouldn't be that difficult to uncover expenses from hedge funds and private equity firms that most people would consider "excessive."  Might we suggest starting with expense reports surrounding annual hedge fund conferences…we're sure there are some treasures there.  That said, with the extensive political influence of most of the large funds we won't hold our breath for the results. 

via http://ift.tt/2c1tX2t Tyler Durden

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