Saturday 6 April 2013

“Hedge Fund Registration: Investor Impact”

“Hedge Fund Registration: Investor Impact”

Radio Shalom, Money and Business – Samuel Ezerzer Host ,Jack Bensimon Co-Host
March 7, 2012 -- Show 17 – Banking and Securities Regulatory Compliance
“Hedge Fund Registration: Investor Impact”
listen to show

with Jack J. Bensimon, Managing Director, Risk Diagnostics


Now that the Dodd-Frank Act has been passed by both houses of Congress, we finally know its broad implications for hedge funds. As expected, it requires all large hedge fund advisers to register with the SEC. Also the new rules on derivatives trading have an additional impact on many hedge funds.
 However, since the Act leaves many specifics up to the regulators, considerable uncertainty remains about the exact form of the new rules. The main tradeoff is between the government's desire to learn more about hedge funds, both to assess systemic risk and to protect investors, and the compliance costs this imposes on funds and investors.
Prior to the Dodd-Frank Act in the United States, hedge funds and investment advisers were not required to register with the SEC if they maintained less than fifteen clients during the previous twelve months and did not present themselves to the public as an investment advisor.
Today The Dodd-Frank Act requires all hedge fund advisers above $150 million to register with the SEC. They have to maintain extensive records about their investment and business practices, provide this information to the SEC, hire a chief compliance officer to design and monitor a compliance program, and be subject to periodic SEC examinations and inspections. The SEC is also given considerable power to expand its own authority in the future: it has the power to request any additional information it deems necessary, it can define "mid-sized" private funds and require them to register as well, and it can impose separate recordkeeping and reporting requirements on all other hedge funds.
However, "family offices" are exempt from registration.
Overall, how economically sensible is hedge fund regulation in the Act?
How much systemic risk do hedge funds really generate?
Investor Protection of hedge fund  is it now something the SEC is also officially authorized to be engage in ? Are Non Sophisticated investors protected and how much will it cost in administration fees?
And how and why will the Volker rule in the USA affect canadian Institutions and Investors alike?

With us today live to give us their professional insights is our co-host and in-resident banking /securities law regulatory compliance expert, Jack Bensimon, Managing Director of Risk Diagnostics, a risk management consultancy in Toronto also joining us from Sans Fransisco is  Amy Zhang is the managing member of Affinity Fund Services, a hedge fund administration firm, and direct from Wayne, Pennsylvania (Greater Philadelphia Area Lenny Dendunnen  Managing Director at OPVS Group Americas President and Chief Investing Principal at Denmor Asset Management )
My name is Samuel Ezerzer, your host to the Money & Business show on Radio Shalom, CJRS 1650 AM. Thank you for tuning in live with our Business studios headquarters in Montreal, the financial capital and the home to the greatest hockey team, the Montreal Canadians. We have another great show for you today and as always, you can call if you have any questions, comments, or criticisms on today's topic. Please call us direct at 514 738 4100 ext 200 or email me at if you have any inquiries. You can also visit our website at – all our shows are archived there . I work as Financial Consultant for T.E MIRADOR or TE WEALTH. TE MIRADOR has been providing Corporate Executives , CEO 'S , families ,employers and employee with independent wealth management and Financial education services since 1972. You can visit our website for my contact information,

Today’s topic of discussion: “Hedge Fund Registration: Investor Impact”


The Earl Jones settlement with RBC

Sam to Jack:  The Earl Jones story came to light yesterday, as RBC settled on the issue. We had discussed this very issue on our fraud show with reknown forensic accountant, Edward Nagel.  What does this reveal about the due diligence procedures of banks?

It reveals a couple of things, probably most important that due diligence procedures at banks need to be enhanced in a major way. This is not favourable to the reputation of RBC, and reputation is at the core of a financial institution’s brand equity. These cases show that operational procedures need to be improved.

Sam to Jack: Although Canada has not had a fraud the scale of a Bernie Mafoff to the tune of $60B, Ponzi schemes in Canada are becoming more common. Have banks become more complacent to breed more fraud?

 Banks have made efforts, partly by regulator and board pressure, to better get to know their clients through know-your-client procedures and other internal controls. This case shows that even at the biggest Canadian bank (and perhaps the most conservative), there can and will be some slippage. Fraudsters are ever more sophisticated, and continually looking to penetrate internal compliance systems with the banks. 

Sam to Jack: Did RBC do the right thing to settle with investors in this case?

Jack to Sam: There is no doubt, RBC did the right thing – by making investors whole, they are assuming responsibility for internal control failures. It was not entirely their fault, and some liability should be placed with the banks. All banks have a regulatory obligation to know the nature of their clients and the accounts in which funds are used for. Funds were pilfered from Jones’ trust account that had no legal basis to be used for his purposes. Good KYC controls should have detected that at some level.  

GUEST (3-4 minutes)

Jack Bensimon
Our guest today is Jack Bensimon, Managing Director of Risk Diagnostics Inc., an independent securities regulatory compliance consulting firm located in Toronto’s Bay St. core. He has worked in the securities industry for over 18 years, mainly acting as Chief Compliance Officer (CCO) for banks, investment banking and counselling firms, trust companies, and broker-dealers. He has testified as an expert anti-money laundering witness in federal court for a major banking litigation case.

He is a graduate of the University of Toronto, The Wharton School, University of Pennsylvania (Investment Management). Jack has a Master of Laws (LL.M.) in Securities Law and a Master of Laws in the General stream from Osgoode Hall Law School (York University). He is completing another Master of Laws (LL.M.) in Business Law at the University of Toronto, Faculty of Law, on a part-time basis. He is also chair of the subcommittee and board member of the Canadian Technion Society. The Technion-Israel Institute of Technology is based in Haifa, Israel. He can be reached at
And with us today live from San Fransisco , is Amy Zhang.

Amy Zhang
Amy Zhang is the managing member of Affinity Fund Services, a hedge fund administration firm based in San Francisco.  Her firm prepares accounting records and annual financial statements for hedge funds across the country, and she advises emerging managers on start-up process, capital raising and other operational issues.  Ms Zhang is a licensed CPA in CA.  She’s a member of AICPA and CFA Institute, and serves as a board member of California CPA Society San Francisco Chapter.

Disclaimer: The suggestions, views, and experiences presented here are in no way, directly or indirectly, to be interpreted as legal or financial advice.

Segment I: Introduction to Hedge Fund Registration

[sam to amy] Q1. what is the big fuss about hedge funds now being registered from an administrative perspective?

[Sam to amy] Q2. what challenges does this present for hedge fund administrators?

[Sam to amy] Q3. will registration make it more difficult for hedge funds to distribute riskier products to investors?

[sam to amy] Q4. which hedge funds are most likely to experience the greatest pain from these administrative requirements?

Segment II: The Administrative Impact and Cost for Investors
[sam to amy] Q1: why is hedge fund registration important for investors?

[sam to amy] Q2. what do investors need to be concerned about with this new registration regime?  

[sam to amy] Q3. what are the costs and benefits for investors from heightened red-tape of hedge funds?

 [sam to amy] Q4: on balance, are these changes a net benefit or cost to retail customers investing in hedge funds?
direct from Wayne, Pennsylvania (Greater Philadelphia Area Lenny Dendunnen  Managing Director at OPVS Group Americas President and Chief Investing Principal at Denmor Asset Management )

Lenny Dendunnen

Mr. Dendunnen taught International Economics at Tufts University before coming to Wall Street in 1987. He ran large proprietary derivative portfolios in Foreign Exchange and Fixed Income at places such as Drexel Burnham, UBS, Bankers Trust, CIBC and Barclays Capital before moving to the buy-side in 1999. He was a portfolio manager focusing on Foreign Exchange and Equity Index Options at two Connecticut Hedge Funds before launching his own Commodity Trading Advisory. He has been intimately involved in the development of a Singapore based Asian Credit Hedge Fund and a US Market Neutral Equity Hedge Fund. He has close relationships with alternative investors at Pensions, Endowments, Multi-Family Offices and Fund of Funds throughout the world. He is currently advising an Investment Partnership focused on the potential unsustainability of the fiscal situation in Japan as well as developing a dynamic correlation hedge for a Fund of Funds. He is also putting together financing packages (debt, cash equity and tax equity) for commercial solar power projects.

Segment III:  Hedge Fund Registration: The Costs and Benefits for Investors
1.       How will the new hedge fund registration regime affect the structure of hedge fund costs and fees?
 I Registration is another constraint placed on a business. It can (and should) be viewed as a tax. This tax is regressive in that it will be more difficult to bear by smaller and emerging hedge fund managers.  These funds are typically lean and mean and have historically outperformed their larger and more seasoned brethren. Costs will arise from either having to add staff for compliance or forcing managers to take some of their focus away from their core competencies (identifying investment/trading opportunities, managing risk, cutting losing positions etc) and focus on the mundane. The results will be higher costs and/or reduced performance. I could also argue that this may also add a new level of risk to smaller funds.

2.  What are some of the benefits that will accrue to investors from this new regime? 

It is important to remember exactly what a hedge fund is. It is a partnership between a limited number of accredited investors (LP’s) who partner with a GP to allocate their funds in a manner consistent with the terms of their partnership agreement.  Having worked at raising funds from Pensions, Endowments, Multifamily offices and Fund of Funds I can only describe the process as a courtship which may or may not culminate in a marriage. There is simply no substitute for due diligence. If I think that because a fund is registered it somehow has the Good Housekeeping Seal of Approval. I am sadly mistaken.  If I choose to take a mail-order bride from an agency in Russia I am exposing myself to uncertainty. If the agency is registered with the Russian government will not really impact the outcome. If I based my decision to marry this woman sight unseen, taking comfort that she has somehow been registered, I am a fool. Right now there are groups such as HFR out of Chicago which most hedge funds list with. They monitor the performance and size of most hedge funds in the world. Funds sign up by choice and for exposure to potential investors. Some may argue that registration is needed to prevent fraud. I am sorry I do not buy that. Some of the largest frauds have been committed by registered and regulated entities. Some may argue that it will make ity easier for investors to make informed decisions. I simply don’t buy that.  It is my feeling that some may be looking for a way to layoff the guilt of a bad decision.  The moral hazard in this type of logic is frightening.

  3.  What are the most significant costs that may be passed onto investors? 

TAANSTFL  (there ain’t no such thing as a free lunch). The costs may be small with larger funds  (when spread over a large asset base). With smaller funds the costs may be passed on terms of higher fees (or a reluctance to lower them). The thing that concerns me the most is where this may be heading. I have an Orwellian fear of Big Brother. I will argue til I die that registration will not reduce fraud. There may be some motive for future use taxation etc. and I would prefer to avoid that slippery slope. There is an old saying that “If it isn’t taxed licensed or regulated it isn’t worth anything”. A second is “if it ain’t broke, don’t fix it!” 

4.    Is this a net positive or negative for investors, and why? 

It’s a tax. That is good for the tax collector. A family office or Endowment who meets with a hedge fund, explores all facets of the investment decision process, risk management, auditing process, custodial  and prime brokerage relationships involved in this type of investment I can not see how a good housekeeping seal of approval from some agency or quasi agency will do any good. In fact, if you look at the performance of the agencies and quasi government agencies the case for expanding their scope is tenuous at best. For smaller investors who do not have their own research teams “renting” one via a fund of funds or through a multi-family office may be a viable alternative. Some large (and understaffed) state pension Funds rely on third party gatekeepers to perform due diligence. What happens with the information gathered in the registration process is what really scares me.  I am hard pressed to find any GROSS positives for anyone but the agency doing the registration and anyone who may be able to use the information gained from the registration process to their advantage. The potential moral hazard issues are huge. If the costs were trivial George Soros would not  be considering switching from a Hedge Fund Platform to a Family Office structure.

 5.    Has the regulatory pendulum swung too far against hedge funds?  Do I really have to answer this?

Segment IV: Legal Implications for Investors

[sam to jack] Q1.  from a securities law perspective, what are the broader implications for investors?   
Now that hedge funds will be required to be registered with the SEC, this will mean that hedge fund firms will have to comply with a broader set of rules and regulations. This includes compliance rules that have to be followed, hiring a CCO, and paying much more attention to regulatory compliance issues. By virtue of being registered, hedge funds now must regularly monitor their compliance programs to ensure that are not violating any SEC rules.
Over time, this heavier regulatory risk exposure will equate to higher compliance costs, which eventually is likely to be passed onto investors by way of higher fees embedded in the 2-20 ratio. 
[SAM to jack] Q2. how will hedge fund registration affect the way products are bought and sold to investors?  
One of the cornerstones of SEC securities rules and regulations within the rubric of U.S. securities statutes is the concept of full, true, and plain disclosure.  Disclosure requires fund issuers to give plain language in prospectus and other disclosures to investors. What this means is that the full spectrum of risks should be clearly communicated to prospective investors – such as credit, market, regulatory, operational, and business risks. Investors need to know precisely what their getting involved with, and how they can liquidate their holdings without major price concessions.
Also, the issue of fees needs full disclosure, As a general rule, there is the 2-20 rule for hedge funds – 2% annual admin fee, and 20% of profits once defined benchmarks are hit. One of the biggest thing investors need to know are fund lock-up periods which may limit time windows in selling the hedge fund in the open market.

[sam to jack] Q3.  how will registration affect liability for hedge funds in the marketplace? 

As Amy previously discussed the vagaries of the new DFA, this will impose additional challenges for hedge funds. DFA is an extra layer of regulation that will make it excessively costly to run hedge funds. 

Also, the Volcker rule imposes Chinese Walls or barriers in separating banking from investment banking liability trading. There are severe limits on prop trading for banks, which puts a cap on IBs for some of these hedge funds in separating these two very important and lucrative banking segments. So, what we’re seeing here are some superficial barriers to entry in a sector that has been under the regulatory radar for the last 10 years. Regulators are now more heavily scrutinizing these higher risk funds.   

The main legal protections as far as statutory protections are enhanced disclosures in all documents that are before investors. This is especially acute for AIs which is the AUM test of $1M, and disclosures for institutional investors – such as endowments, pensions, and mutual funds.
Enhanced disclosures relate to past performance of the hedge fund and making sure they comply with GIPS (CFA Institute) and that performance is not misleading in anyway, This has become an issue in the last 7-8 years with non-uniform performance presentation standards.
Other issues of disclosure relate to how the hedge fund generates its profits or income, while at the same time the hedge fund not giving away the game. Hedge funds have historically been very secretive and private about their investment strategies.
Segment V:  Conclusions – What should investors take-away from this new regime?

[sam to jack] Q1.  has the regulatory pendulum swung too far against hedge funds?
the pendulum should have never been swung this far to begin with. However, this is what happens after a market crisis where regulators need to account for a heightemed regulatory regime. It’s rare that the pendulum is in the middle at any point in history – swings are historically normal, while that doesn’t mean they are optimal for our markets.
on balance, hedge fund regulation is a net positive as the capital flows into these funds have exceeded a few trillion dollars worldwide, exposing investors to risks they are unaware of. regulation is a partial answer, but is not a fullsome solution to tehe perennial problem of investors conducting rigorous due diligence before buying hedge funds. investors do need a third-party, such as the sec, to provide some level of independence in these turbulent markets.
[sam to Jack] Q2. what should investors take-away from the new requirement to register hedge funds?


Jack, Amy, and Lenny thanks for speaking on our show and providing insights in reviewing and analyzing the various factors behind the SEC requiring hedge funds to be registered under the new regime. It will be interesting to see how these developments play out in the industry, and we look forward to having the three of you back to provide further commentary and analysis. Jack Bensimon can be reached at 416-985-0757, Amy Zhang at, and Lenny    

                                                               samuel ezerzer

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