Current Hedge Fund Debates and Controversies

2017 ◽  
Author(s):  
Dianna C. Preece
Keyword(s):  
Insider Trading ◽  
Hedge Funds ◽  
Conflicts Of Interest ◽  
Hedge Fund ◽  
Securities And Exchange Commission ◽  
Active Management ◽  
Wall Street ◽  
Net Worth ◽  
Market Participants ◽  
Alternative Beta

The hedge fund industry has grown to nearly $3 trillion over the last 20 years. High-net-worth individuals and institutional investors expect high returns and low correlation with traditional asset classes in exchange for the fees paid. The standard fee structure is “2 and 20,” 2 percent of assets under management and 20 percent of profits, representing high fees for active management. Hedge funds are largely unregulated and somewhat mysterious. As a result, they are the subject of debates and controversies among market participants and policymakers alike. Debates focus on fee structures, alpha versus alternative beta, weakening returns, activist investors, and leverage. The Securities and Exchange Commission has targeted hedge fund misconduct and malfeasance, pursuing perpetrators of fraud, insider trading, and conflicts of interest in the industry. Several high-ranking Wall Street hedge fund executives have been charged with, and in some cases convicted of, breaking securities laws.

Securities Regulation

2019 ◽  
pp. 287-324
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Hedge Funds ◽  
Financial Regulation ◽  
Regulatory Reform ◽  
Securities And Exchange Commission ◽  
Securities Regulation ◽  
Futures Trading ◽  
Product Lines ◽  
Wall Street ◽  
Consumer Protection Act ◽  
Commodity Futures Trading Commission

Prior to the 2007 financial crisis, financial regulation was compartmentalized along lines of segmented financial instruments. With the exception of the regulation of swaps as described in chapter 14, post-crisis regulatory reform maintains this bifurcation of regulation along product lines between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC and the CFTC have begun to issue rules establishing a coordinated approach to regulating certain derivatives under the Wall Street Reform and Consumer Protection Act (widely known as the Dodd-Frank Act) in particular as they relate to swaps. This chapter discusses the jurisdiction of the SEC, what constitutes a security, sellers’ representations, consequences of securities, hedge funds, and derivatives regulation.

8 Investor Protection Concerns in Private Investment Funds

2018 ◽  
Author(s):  
Spangler Timothy
Keyword(s):  
Hedge Funds ◽  
Private Equity ◽  
Business Models ◽  
Conflicts Of Interest ◽  
Investor Protection ◽  
Hedge Fund ◽  
Private Investment ◽  
Investment Funds ◽  
Equity Funds ◽  
Private Equity Funds

This chapter examines the governance challenge in private investment funds arising from investor protection failures. It begins with a discussion of the Madoff affair, which brought to the fore alleged failures in reporting, oversight and governance mechanisms regarding private investment funds, whether hedge funds, private equity funds, real estate opportunities funds or other more esoteric investment pools. It then considers some issues which the Madoff debacle drew attention to, including the presence of multiple fund vehicles in the same structure or in interconnected structures such as parallel funds, master-feeder, and fund of funds. It also analyses the Financial Conduct Authority’s (FCA) concerns about hedge fund fraud and conflicts of interest that may arise in the business models of any of the participants in the private equity market. Finally, it describes ongoing diligence and oversight regarding private investment funds and the Securities and Exchange Commission’s (SEC) concerns over due diligence involving private funds.

scholarly journals AN EVALUATION OF HEDGE FUNDS: RISK, RETURN AND PITFALLS

2002 ◽  
Vol 47 (01) ◽  
pp. 153-171 ◽  
Author(s):  
FRANCIS KOH ◽  
DAVID K. C. LEE ◽  
KOK FAI PHOON
Keyword(s):  
Hedge Funds ◽  
Legal Status ◽  
Hedge Fund ◽  
Empirical Work ◽  
Risk And Return ◽  
Net Worth ◽  
Empirical Risk ◽  
And Performance ◽  
Short Sell ◽  
Risk Dimensions

Hedge funds are collective investment vehicles fast becoming popular with high net worth individuals as well as institutional investors. These are funds that are often established with a special legal status that allows their investment managers a free hand to use derivatives, short sell and exploit leverage to raise returns and cushion risk. Given that they have substantial latitude to invest, it is instructive to examine the performance of hedge funds as compared to other forms of managed funds. This paper provides an overview of hedge funds and discusses their empirical risk and return profiles. It also poses some concerns regarding the empirical measurements. Given the complexity of hedge fund investments, meaningful analytical methods are required to provide greater risk transparency and performance reporting. Hedge fund performance is also beset by a number of practical issues generating "practical risks". These risks are not fully addressed by the usual risk-adjusted performance measures in the literature. A penalty function to discount these extraneous risk dimensions is proposed. The paper concludes that further empirical work is required to provide informative statistics about the risk and return of hedge funds.

scholarly journals Long-Term Bias

2020 ◽  
Vol 2020 (1) ◽  
Author(s):  
Michal Barzuza ◽  
Eric Talley
Keyword(s):  
Case Studies ◽  
Behavioral Finance ◽  
Hedge Funds ◽  
Wall Street ◽  
Corporate Managers ◽  
Market Participants ◽  
Folk Wisdom ◽  
Earnings Warnings ◽  
Short Termism

An emerging consensus in certain legal, business, and scholarly communities maintains that corporate managers are pressured unduly into chasing short-term gains at the expense of superior long-term prospects. The forces inducing manage- rial myopia are easy to spot, typically embodied by activist hedge funds and Wall Street gadflies with outsized appetites for current quarterly earnings. Warnings about the dangers of “short termism” have become so well established, in fact, that they are now driving changes to mainstream practice as courts, regulators and practitioners fashion legal and transactional constraints designed to insulate firms and managers from the influence of investor short-termism. This Article draws on ac- ademic research and a series of case studies to advance the the- sis that the emergent folk wisdom about short-termism is in- complete. A growing literature in behavioral finance and psychology now provides sound reasons to conclude that corpo- rate managers often fall prey to long-term bias—excessive op- timism about their own long-term projects. We illustrate sev- eral plausible instantiations of such biases using case studies from three prominent companies where managers have argua- bly succumbed to a form of “long-termism” in their own corpo- rate stewardship. Unchecked, long-termism can impose sub- stantial costs on investors that are every bit as damaging as short-termism. Moreover, we argue that long-term managerial bias sheds considerable light on the paradox of why short- termism evidently persists among supposedly sophisticated fi- nancial market participants: shareholder activism—even if unambiguously myopic—can provide a symbiotic counter-bal- last against managerial long-termism. Without a more defini- tive understanding of the interaction between short- and long- term biases, then, policymakers should be cautious about em- bracing reforms that focus solely on half of the problem.

Cerberus and the U.S. Auto Industry

2017 ◽  
pp. 1-16
Author(s):  
David P. Stowell ◽  
Jeremy Hartman
Keyword(s):  
Significant Role ◽  
Hedge Funds ◽  
Private Equity ◽  
Conflicts Of Interest ◽  
Low Cost ◽  
Hedge Fund ◽  
Auto Industry ◽  
The U.S

This case explores how and why GM became a major user of private equity and hedge fund capital, as well as the risks and rewards of these new relationships. The Cerberus transaction, audacious in both its size and complexity, is explored in detail. What were the alternatives for GM, and what risks and opportunities lay ahead for both parties? This case investigates the benefits, disadvantages, and potential conflicts of interest that evolved as GM's many suppliers increasingly embraced low-cost, nontraditional financing from hedge funds.To analyze the significant role that private equity and hedge funds play in providing capital to corporations, especially those in distressed industries.

SEC and FDIC proposed rules on the orderly liquidation of certain large broker-dealers

2016 ◽  
Vol 17 (3) ◽  
pp. 42-48
Author(s):  
Andrew Blake ◽  
Robert Robinson ◽  
Alex Rovira ◽  
Charles Sommers
Keyword(s):  
Financial Services ◽  
Deposit Insurance ◽  
Federal District ◽  
Securities And Exchange Commission ◽  
District Court ◽  
Wall Street ◽  
Content Type ◽  
Market Participants ◽  
Final Rule ◽  
Administrative Expenses

Purpose To alert financial market participants to rules jointly proposed by the US Securities and Exchange Commission (SEC) and US Federal Deposit Insurance Corporation (FDIC) regarding orderly liquidation of certain large broker-dealers as mandated in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Design/methodology/approach Explains how typical broker-dealer liquidations are generally effected, the alternative of determining a broker-dealer to be a “covered broker-dealer” to be liquidated through an orderly liquidation proceeding under Title II of Dodd-Frank, the appointment of the FDIC as receiver and Securities Investor Protection Corporation (SIPC) as trustee, the requirement for the SIPC to file a protective decree with a federal district court, the possible use of “bridge broker-dealers” to facilitate an orderly liquidation, the FDIC’s procedures for settling claims of customers and other creditors against covered broker-dealers, and additional proposed provisions for administrative expenses and unsecured claims. Findings Counterparties of broker-dealers that could be subject to an orderly liquidation proceeding should evaluate the proposal and consider whether, if adopted, the rules would require any changes to credit risk or other internal procedures. Large broker-dealers that could be the subject of such an orderly liquidation proceeding should do the same. Although the formal comment period has closed regarding the proposal, market participants that did not submit comments but who still wish to influence final rule making should still consider submitting written comments to the SEC and FDIC or otherwise advocating before them. Originality/value Practical guidance from experienced securities and financial services lawyers.

Investor behavior: hedge fund returns and strategies

2017 ◽  
Vol 9 (1) ◽  
pp. 14-42 ◽  
Author(s):  
Andres Bello ◽  
Jan Smolarski ◽  
Gökçe Soydemir ◽  
Linda Acevedo
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Management Style ◽  
Active Management ◽  
Warning Sign ◽  
Content Type ◽  
Market Sentiment ◽  
Irrational Behavior ◽  
Market Fundamentals ◽  
Hedge Fund Returns

Purpose The purpose of this paper is to investigate to what extent hedge funds are subject to irrationality in their investment decisions. The authors advance the hypothesis that irrational behavior affects hedge fund returns despite their sophistication and active management style. Design/methodology/approach The irrational component may follow a pattern consistent with the observed hedge fund returns yet far distant from market fundamentals. The authors include factors beyond the original version of capital asset pricing model such as Fama and French and Carhart models, as well as less stringent models, such as APT and Fung and Hsieh, to test whether these models are able to capture the irrational nature of the residuals. Findings After finding that institutional irrational sentiments play a role in hedge fund returns, we note that the returns are not completely shielded against irrational trading; however, hedge fund returns appear to be affected only by the irrational component derived from institutional trading rather than that emanated from individuals. Research limitations/implications Different sources of irrationality may have asymmetric effects on hedge fund returns. Using a different set of sophisticated investors along with different market sentiment proxies may yield different results. Practical implications The authors argue that investors can use irrational beta to gauge the extent of institutional irrational sentiments prevailing in markets for the purpose of re-adjusting their portfolios and therefore use the betas as an early warning sign. It can also guide investors in avoiding funds and strategies that display greater irrational behavior. Originality/value The study advance the idea that the unexpected, hereafter irrational, component may follow a pattern consistent with the observed hedge fund returns, yet different from market fundamentals.

Hedge Fund Governance

2017 ◽  
Author(s):  
Lamia Chourou ◽  
Ashrafee T. Hossain ◽  
Samir Saadi
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Best Interests ◽  
Individual Investors ◽  
Net Worth ◽  
Fund Managers ◽  
Governance Practices ◽  
Governance Challenges ◽  
Fund Governance ◽  
Dramatic Shift

Hedge fund governance has attracted much interest since the financial crisis of 2007–2008 resulting in a dramatic shift in hedge funds’ shareholder composition, from high-net-worth individual investors to active institutional investors. The crisis, coupled with some major scandals, including Bernard Madoff’s multi-billion-dollar Ponzi scheme and the Weavering Capital fraud, uncovered poor governance practices in the hedge fund industry. Fund managers now face serious governance challenges that tend to focus on governance arrangements and independence of fund boards. Maintaining quality governance rules in hedge funds is critical for the industry. Evidence suggests that having sound and transparent governance practices is in the best interests of hedge fund managers. This chapter first addresses the development of corporate governance, followed by an analysis of hedge fund governance. Next the chapter explores the ongoing governance debates facing the industry. The chapter ends by discussing the changing nature of hedge fund governance.

SEC’s enforcement action against hedge fund adviser for retaliation against a whistleblower highlights challenges employers face

2014 ◽  
Vol 15 (4) ◽  
pp. 7-10
Author(s):  
Bryan B. House ◽  
Pam L. Johnston ◽  
Courtney Worcester
Keyword(s):  
Hedge Fund ◽  
Securities And Exchange Commission ◽  
Wall Street ◽  
Content Type ◽  
Enforcement Action ◽  
The Status ◽  
The Usa ◽  
Fraudulent Activity ◽  
Enforcement Authority ◽  
A Company

Purpose – To explain a recent enforcement action by the USA Securities and Exchange Commission (SEC) whereby the SEC brought its first enforcement action for retaliation against a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Design/methodology/approach – Explains the SEC’s recent enforcement action under Dodd-Frank, highlighting the efforts that a company undertook with respect to continuing to employ a whistleblower after potentially fraudulent activity was reported and discusses practical problems faced by such companies when trying to simultaneously investigate potential wrong-doing without being seen as retaliating against a whistleblower. Findings – Through this enforcement action, the SEC has demonstrated a willingness to bring cases to enforce Dodd-Frank’s anti-retaliation provisions even though Dodd-Frank does not expressly grant it such enforcement authority. Practical implications – Companies must have a strong culture of compliance and a strong policy encouraging whistleblowers to report concerns internally if at all possible. Once the whistleblower has reported to the SEC, a company will need to maintain the status quo with respect to the whistleblower. Originality/value – Practical guidance from attorneys with experience with the SEC and whistleblower actions.

Outsourcing Compliance Functions and Fraud Detection

2021 ◽  
pp. 436-473
Author(s):  
David M. Shapiro
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Fraud Detection ◽  
Securities And Exchange Commission ◽  
Commodity Futures ◽  
Futures Trading ◽  
Compliance Function ◽  
The Us ◽  
Key Issues ◽  
Commodity Futures Trading Commission

This chapter addresses the compliance function for hedge funds and considers areas where violations can occur. It surveys regulation in place in the US and internationally, looking in particular at the Securities and Exchange Commission and the Commodity Futures Trading Commission, and highlights key issues. Primarily, the chapter focuses on the outsourced nature of many of the agents responsible for providing assurance of the honesty of hedge fund operations, including trading, and reporting, registration, and discussing how compliance is made effective. The chapter concludes by considering the risks that require further research.

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