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House eyes fund rules
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September 22, 1999: 9:22 p.m. ET
Legislation expected Thursday, though experts deem it too little too late
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Legislation that would require large hedge funds to make themselves and their financial dealings transparent to the public and to securities and banking regulators will be introduced in the House of Representatives Thursday by U.S. Republican Richard Baker.
The proposal comes in the wake of last year's financial disaster involving Long Term Capital Management LP which, through the exposure of its clients' holdings to risky bets on the direction of financial markets, was brought to the brink of collapse. The New York Federal Reserve ultimately arranged a $3.6 billion bailout for the firm.
Baker's legislation, in theory at least, would ensure that large hedge funds aren't able to place large bets with their clients' money without regulators and the general public knowing about it.
"After considering the report and testimony at several hearings held by the House Committee on Banking and Financial Services, I have concluded that the most appropriate response to the treatment of hedge funds is a measured, market-orientated approach of enhanced disclosure," the Louisiana Republican said.
Won't have an impact
In practice, however, the proposal will have little effect, according to one industry expert. That's because the legislation only applies to a very small number of hedge funds - most of whom have already long backed away from their risky, leveraged dealings in the wake of LTCM and the market turmoil it caused.
"This doesn't sound like it's going to have a tremendous amount of impact," said John Van, vice president of Van Hedge Fund Advisors International, a Nashville, Tenn.-based hedge fund investment advisory firm. "Natural market forces have already taken care of the problem, so it wouldn't apply to very many participants."
Under the proposal, a hedge fund with more than $3 billion of capital or with assets in excess of $20 billion would be required to file quarterly reports with Federal Reserve, the Treasury Department, the Securities and Exchange Commission and other investment interest groups. Any hedge fund with leverage ratios of more than 10:1 would also be required to disclose its holdings.
However, of the estimated 5,830 hedge funds worldwide, fewer than 10 would fall under any of those categories, "an extremely small number," Van said. "Before August 1998 and LTCM there may have been more funds out there that had that amount of money or assets or were leveraged that high, but there really aren't any now."
Who would it apply to?
According to Van's research, about 3.1 percent of hedge funds worldwide currently have assets in excess of $500 million, significantly below the criteria Rep. Baker's legislation would cover. Those that are leveraged by a ratio of 10:1 or more account for "probably less than 5 percent" of hedge funds worldwide, Van said.
And while the notion of keeping hedge funds on the up and up by ensuring they report their activities to the public is noble, there are other, much larger types of pooled cash that would be missed under the current proposal.
"I'm not saying pension funds or other types of investment vehicles out there are up to bad things, only that hedge funds represent a very small portion of the total amount of investment money out there," Van said.
Baker's proposed hedge-fund safeguard isn't new. He announced in June that he was planning to introduce a bill to avoid another crisis like the near-collapse of LTCM and the damage it wrought on financial markets. His declaration at the time was in response to two private-sector reports that both advocated self-imposed disclosure by the hedge funds.
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