Regulation of Hedge Funds

   One of Donaldson's more controversial legacies is the registration of hedge funds, scheduled to take effect in February of 2006.  There is some question whether the new SEC Chair, Chris Cox, will roll back the regulations.  If not, hedge funds will be subject to regular SEC audits and inspections.  The funds will also have to file information with the SEC on their trading strategies, portfolio valuation methods, and senior executives.  There are the normal regulatory problems.  Small funds cannot afford the compliance costs as well as large ones; some funds will be driven offshore; and some funds will operate on the borders of the rule (requiring investors to commit to two years, for example, to take advantage of the private equity fund exemption).  Like most of what the SEC has done of late these issues do not seem to have be very carefully thought out.  So whether the regulation will stick is in doubt and whether the regulation will work if it does stick is in doubt.