Hedge Funds Begin to Show Up on Regulators' Radar

Even though the government has been reluctant to take on hedge funds, the collapse last year of Amaranth, resulting in a loss of $6 billion, and the renewed interest of multiple government outlets is prompting some of the largest funds to abandon their private, go-it-alone approach. Hedge funds are stepping up their lobbying, hiring new staff members for their main Washington trade group, the Managed Funds Association, and creating a second organization to educate lawmakers and regulators about the industry. Previously, hedge funds had not been heavily involved in the lobbying game.

The Managed Funds Association aims to more than double the size of its political action committee, to $400,000, in the current election cycle and has been widening its lobbying efforts. "We want to be part of identifying the problem and part of designing the solution," said Lisa S. McGreevy, the group's new vice president and a veteran of more than two decades as a financial services industry advocate.

Also last year, a group of a dozen hedge funds formed the Coalition of Private Investment Companies, which will lobby and take a more active stance with regulators and legislators. Job one, said lobbyist Andrew Lowenthal, is explaining what hedge funds do to an audience that may all too easily fit them into a stereotype.

"Hedge funds right now are a proxy for much of the complexity in the financial services world," he said.

The funds do not appear to be fighting hard against the single pending regulatory proposal that would affect them. Last December, the SEC proposed raising the minimum amount of assets investors would need to be eligible to pour money into hedge funds from $1 million to $2.5 million. If it wins approval, the change would make fund investing more exclusive and protect average investors from the risks inherent in frequent trading.

Still, the growing appeal of hedge funds to less-wealthy people and to pension funds bothers some current and former market watchdog groups.

"The fact that this industry remains for the most part unregulated is worrisome for investors and the markets in general," said Joseph P. Borg, president of the North American Securities Administrators Association, a trade group for investor protection officials.

Columbia University law professor Harvey J. Goldschmid, a former SEC commissioner, warned that the industry is only "two serious scandals away" from vigorous legislation that goes far beyond the registration drive that the agency attempted two years ago.