Gary Gensler's 2-and-20 Push Won't Help Hedge Fund Investors
The SEC chair’s suggestions that fees should go down would foster strategies designed to attract clients rather than improving performance.
SEC Chair Gary Gensler is worried about high hedge fund fees.
Photographer: Evelyn Hockstein/Pool/Getty Images
Securities and Exchange Commission Chair Gary Gensler gave a speech this week to the Institutional Limited Partners Association, a lobby group of hedge fund investors, and it seemed out of step with both the history of investment fund regulation and the needs of hedge fund investors today. It started with the standard paean to New Deal financial regulation that omits the most important point vis-a-vis hedge funds, which is that private funds were created to avoid the problems that legislation caused.
SEC and Internal Revenue Service rules pretty much forced funds to buy only highly liquid stocks and bonds without concentrated positions, leverage, shorting or derivatives. Positions had to be disclosed publicly. It proved impossible for managers to beat index funds under those constraints, but the legislation allowed managers to charge 8.75% of assets as a load when a fund was purchased or money was moved to a new fund, which advisers could do every three years without attracting oversight attention. Annual management fees often topped 2%. Virtually no investors read the SEC-mandated proxies, mainly because they were written to protect managers against investor lawsuits, not to help investors. The mutual funds that helped investors — index and money market funds — were initially blocked and then discouraged by the SEC.