Hedge Fund De-Regulation

Jesse Eisinger has a fascinating story in the WSJ this morn, which starts with this line: "Phil Goldstein, hedge-fund champion, is the unhedge-fund manager."

After the SEC decided to regulate hedge funds, the industry complained — yet no one bothered to do anything about it. Despite the access to top legal talent, and the wealth needed to prosecute a case such as this, Goldstein was the only guy willing to challenge the SEC‘s jurisdiction in regulating hedgies.

No one else was willing to step up. So this single hedge fund manager decided to teach the SEC a lesson. He sued the agency, claiming the hedge fund regulation was "arbitrary."

And he won. Decisively. (The court said the rule was arbitrary, because it exempted funds with fewer than 15 clients).

Here’s an excerpt:

"He stands out among hedgies not because he was raised in blue-collar Brooklyn; those bootstrap stories are fairly common in the industry. It may be that he was a New York City civil engineer for 25 years. Now 61 years old, he made the move from managing building projects to running money in 1992. These days, a city worker has less of a chance of managing others’ wealth than Jeff Skilling has of ringing the opening bell of the New York Stock Exchange.

The clincher of his maverick status in the world of hedge-fund managers is that Mr. Goldstein will admit, on occasion, that there are things he doesn’t do well.

"I was never a very good engineer. It wasn’t until my mid-to-late forties that I decided what I wanted to do when I grew up," he explains. Even today, he says, "I’m not a valuation expert. I’m a good value investor, but not that good." He credits his partner with his small-time ($225 million) operation’s best investing instincts. He calls his main investment technique — buying closed-end funds trading at a discount to their asset value — "investment for dummies."

But Mr. Goldstein is good at stirring up trouble. Although more than 1,200 hedge funds registered under the new rule, he detested it. So he decided to fight. No other hedge fund joined his suit. Few gave him much of a shot to prevail. The fight cost him and his partners $300,000 out of his own pocket — not, he emphasizes, his investors’ pockets."

I love a good human interest story, the lone gunner taking on a huge faceless bureaucracy — and kicking its arse.

Goldstein was quoted after the decision "I don’t want to sound gloating, but it was an incredible waste of time and resources, both for the hedge-fund industry and for the SEC."

I also agree with Jesse’s conclusion:

"The SEC should have offered some carrot with its stick of registration. It still can. Let hedge funds advertise. Let them tout performance, as mutual funds do. Let them open themselves up to a wider variety of investors.

Then Congress should make them register."

Interesting stuff . . .


A David Toppled Hedge-Fund Rule, But Was Goliath Really So Bad?
June 28, 2006; Page C1

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