Hedge funds: regulators and market participants are taking steps to strengthen market discipline

Original publisher: [Washington, D.C.] : U.S. Govt. Accountability Office, [2008] OCLC Number: (OCoLC)214285833 Subject: Hedge funds -- United States -- Management. Excerpt: ... hedge funds frequently borrow or trade in products with leverage to magnify their returns, leverage also can increase their losses. Appendix III provides examples of investment strategies used by hedge funds. Advisers of hedge funds commonly receive a fixed compensation of 2 percent of assets under management plus 20 percent of the fund's annual profits. Some fund advisers can command higher fees. Since this compensation scheme rewards hedge fund advisers for exceptional performance, but does not directly penalize them for inferior performance, advisers could be tempted to pursue excessively risky investment strategies that might produce exceptional returns. To discourage excessive risk taking, investors generally insist that the advisers and principals also personally invest in their funds to more closely align principals ' interests with those of fund investors. SEC's ability to directly oversee hedge fund advisers is limited to those Hedge Funds that are required to register or voluntarily register with SEC as investment Generally Are Subject advisers. Recent examinations of registered advisers raised concerns in areas such as disclosure, reporting and filing, personal trading, and asset to Limited Direct valuation. Also, under a program established in 2004, SEC oversees, on a Oversight, but consolidated basis, some of the largest internationally active securities firms that engage in significant hedge fund-related activities. CFTC directly Regulatory Focus Has oversees registered CPOs and CTAs ( some of which may be hedge fund Increased since LTCM advisers ) through market surveillance, regulatory compliance surveillance, an examination program delegated to NFA, and enforcement actions. The banking regulators also monitor hedge fund-related activities at the institutions under thei...