A National Securities Arbitration & Investment Fraud Law Firm

FacebookTwitterLinkedInJustiaFeed

Articles Tagged with hedge funds

Published on:

The U.S. Securities and Exchange Commission (“SEC”) has formed a new group to increase oversight of private equity and hedge funds.  The SEC has assigned two former industry veterans to oversee the unit.  The SEC frequently creates these units when it sees increased activity in a particular type of investment product or is concerned that a particular segment of the securities industry may be violating the federal securities laws.  Over the last decade, alternative investments such as private equity and hedge funds have become very popular, and sales of these types of funds have expanded from the institutional level to the retail investor level.

The SEC’s 2014 Compliance Outreach Program focused on alternative investments such as hedge funds.   Private funds run by private equity firms, hedge funds, venture capital funds and other alternative investments have been the subject of heightened scrutiny during the last several years, furthered by the creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the financial crisis.

At the 2014 SEC Compliance Outreach Program, the SEC brought attention to a number of concerns it has relating to private equity.  Among the SEC’s rising concerns in this area are vague limited partnership agreements and poor disclosure practices to limited partnerships at private equity funds, the shifting of fees and expenses at those funds, and misleading performance and valuation metrics at private equity firms and hedge funds.

Published on:

According to recent SEC filings, the Endowment Master Fund LP, has offered investors an exit strategy from the hedge fund offering a new fund through a Private Placement Memorandum (PPM) which will be used to liquidate the Fund.  The Endowment Master Fund, LP was marketed heavily by Wall Street firms, including Merrill Lynch.  The PPM describes the Offer as a like-kind exchange of investors’ pro-rata interest of the portfolio holdings into a new PMF Fund, LP.   According to the SEC filings, dated February 20, 2014, “the PMF Fund, LP and the Endowment Master Fund, LP will be managed differently, with the PMF Fund, LP managed for purposes of orderly liquidation.”

For investors, the Offer provides little certainty because investors must choose whether to liquidate now without knowing the true value of the Fund which will be determined at a later date.  `The Offer for the like-kind exchange expires March 19, 2014 which requires more than a leap of faith for investors in a hedge fund that has languished far behind the market returns.  Investors must make an investment decision without knowledge of the value exchanged and how much will be realized during the liquidation period.  According to the New York Times article, After Weak Returns, the Endowment Fund Limits Withdrawals, the hedge fund, “began to struggle in 2011, suffering losses of about 4.1 percent, after fees, compared with a gain of 2.5 percent by the S&P 500.”

 On February 24, 2014, a Thomson Reuters article underscores the effects of the substantial hedge fund costs on the Funds dismal performance, “Even for investors who stay with the fund, there will be high costs.  They will not be permitted to ask for any money back this year.  They will also be charged a 1 percent management fee and a 1 percent servicing fee.  On top of that there will be the fund’s underlying managers’ 1.3 percent management fee and a 16 percent of profits as an incentive fee.”  The article points to the hedge fund underperformance in 2013, “with the fund earning only 2.08 percent last year, dramatically trailing the Standard & Poor’s 32 percent gain.”  For Merrill Lynch customer’s, “If investors accessed the Endowment Fund through Merrill Lynch they will have paid as much as a 2.5 percent upfront charge.”

Contact Information