Over the last months, there has been more than just a few changes going on in the world of finances that have helped, and hurt, managers. The worst part is that up until recently, most of the change has been to the hurt side of the coin. The recently enacted Dodd-Frank financial reform act, and the resultant regulations that the SEC issued, has had the larger of the Hedge fund managers sitting on egg-shells waiting for a knock on their proverbial doors from an investigator.
New SEC Rules Surprised Everyone – Including The SEC
Not only were the Hedge Fund Managers surprised by the new regulations, the SEC reported initially that there would be only around 750 advisers…they have received more than 70% more than they originally expected. The SEC has no explanation as to why their original estimate was so far off, but has made the statement that they have hired additional staff for, and are planning to hire additional staff for reviews.
Exemptions To The Registration
Hedge Funds and Private Equity Funds are required to register if they have assets of more than $150 million under their management. Also, foreign advisers that have no U.S. capitol funds maintain exemption. So far, it has been reported that larger Hedge funds had little problem getting registered, but the private equity funds are a different matter. The “Custody Rule” being the main issue there. But there are provisions being considered to help with this issue.
The Cost Of Registering
In spite of the ease that Hedge Funds are having in the registration process, the cost to individual managers is high. In their original assessment considering the 750 managers they expected to register, the SEC said that, combined, the total cost for the firms would be in excess of $9.6 million and 38,000 total man-hours. And it seems the cost is more easily absorbed by the firms managing more than $500 million in assets. And, the smaller the firm, the harder the financial demands on the registration are to meet, placing the smaller firms at risk.
Enter The Jump-Starting Our Business Start-ups Act
The JOBS Act was designed to give the investors more of a look into the inner workings of the Hedge Fund Managers. But it also eases off the restrictions of how the Hedge Funds can market themselves to the general public. While this change is quite dramatic, it’s not likely to have a large impact on the larger investment firms, but the smaller ones could feasibly take this freedom and run with it. Now a wider range of investors could become available to the smaller firms, as they would be able to create more robust advertising and websites.
Mixed Messages
It almost appears that the SEC is attempting to eliminate the smaller Hedge Funds…almost. But, once the new marketing rules are passed and applied, as the smaller firms should start planning on now, the opportunity will be there to make up for the damages that the smaller firms incur during the required SEC registration. While the larger firms won’t feel the heat from the SEC registration, their firms are solidly rooted in institutional investors, and advertising won’t benefit them nearly as much as it will the smaller firms…if properly applied.
In the last few weeks there have been concerns raised that the financial firewall in place wouldn’t be enough. The recent bailout handed to Greece, and the Spanish and Italian situations decomposing rapidly, has only served to bolster this concern. At a press conference the European Commissioner for Economic and Monetary Affairs, Mr. Oli Rehn claimed that the firewall must be increased to an amount that would be convincing enough to bolster investor confidence.
According to Rehn and the Organization for Economic Co-operation secretary general, Angela Gurria, the firewall needs to be increased to at least €1 trillion. At this level investors would be more confident in the market and investors could strengthen the economy so that the fund wouldn’t need to ever even be used, as speculation in foreign markets would be decreased. An increase was already in the planning, but the increase would have only brought the level of the firewall up to around €700 billion.
Until the last few days, Germany’s Angela Merkel, and Wolfgang Shaeuble, the country’s finance minister, have resisted the increase in the firewall. But recently, they have made noises that the increase would be agreeable. And this seemed to be the direction the finance ministers meeting in Copenhagen on March 30th will be taking. At this point in the game, an increase would help build more defenses against the debt crisis…here’s a couple of ways it could work.
Currently, the ESM, (Eurpoean Stability Mechanism,) will have €500 billion to lend, and the EFSF, (European Financial Stability Facility,) has €440 billion. Of the EFSF’s fund, €200 is spoken for in Greek, Portugese, and Irish bailouts. As it stands presently, remaining funds in the EFSF would be diverted to the ESM, keeping a €500 billion cap. But there are still a few decisions to make…
Plan 1: Keep the EFSF bailout accounts right where they are at, or at least until payoff which will happen around the middle of 2013, and apply the remaining to the ESM. The bailouts wouldn’t count against the €500 billion cap this way, and would boost the total firewall fund to around €700 billion.
So far the first plan seems to be the way most are thinking the deal will progress…but this raises other concerns. Issues about if this will be enough to instigate the IMF to increase their resources. Another serious concern is will it be deep enough to support a possible Spanish collapse, or restructure?These concerns coupled with the warnings to Greece about not faltering from their path, or disaster would occur, have managed to keep the entire market system locked firmly in investors eyes.
