Hedge funds, those lightly regulated investments for the very affluent, have traditionally kept a low profile. But the funds are increasingly being promoted with coming-out parties. Wall Streetinvestment banks are sponsoring hundreds of invitation-only gatherings a year in places as near as their own boardrooms or as far off as Versailles, France, to help the funds find new investors. Someof these events, run by Morgan Stanley, Goldman Sachs, Deutsche Bank and UBS among others, have been taking place since the late 1990’s. But as more of them are held, lawyers and fund industryexecutives are asking whether they might mislead investors. Securities regulators, too, are increasing their scrutiny of the hedge-fund industry. The U.S. Securities and Exchange Commission prohibitshedge funds from advertising or promoting themselves in the media. Managers of the funds, which are not subject to disclosure requirements and are not required to register with the commission, aretraditionally secretive about their holdings and returns. The investment banks say the gatherings, technically known as capital introduction events, merely ease introductions between fund managersand investors and are not being used to advertise or to promote specific funds.
We never make a push or a recommendation, said David Barrett, managing director of capital introduction at Morgan Stanley. We don’t inject any of our own opinions or subjectivity.
Steven Fredman, a securities lawyer at Schulte Roth & Zabel in New York, said, The prominent players in this area have devoted a lot of attorney time to making sure they’re doing it right.
Mark Yusko, president and chief executive of UNC Management, which manages the $1.4 billion endowment of the University of North Carolina, said the events were not a primary screen but rather a validation of his own research. But some investors may assume that the banks are implicitly endorsing funds whose managers are invited to their gatherings. Investors who are invited are usually clients of the bank in other areas, like asset management or corporate finance, and the managers represent hedge funds that conduct, or might conduct, lucrative business with the banks’ brokerage firms. As a hedge fund gains investors, the bank’s institutional brokerage business, known as prime brokerage, is likely to grow. That business includes securities trading, lending, financing and other services. Barry Colvin is president and chief investment officer of Tremont Capital Management, a firm based in Rye, New York, that operates funds that invest in hedge funds. Referring to the hedge-fund managers that banks are introducing to investors, he said that you can’t assume I hope no one is that these are the cream of the crop.
Discussing capital introduction in its 2003 survey of prime brokerage firms, the trade publication Global Custodian said that the funds that need the service the most are often the ones whose performances merit it the least.
In some cases, the investment banks have a strong interest in attracting investors to certain funds. Goldman Sachs and Bank of America, among others, are providing managers with seed capital to start new funds. The banks stand to reap increased management and performance fees from the funds if they grow through new investments. In the United States alone, the number of hedge funds has almost doubled since 1993, to 4,600 last year, according to Van Hedge Fund Advisors International, a consulting firm in Nashville, Tennessee. It says the worldwide total is about 7,500, with $650 billion in assets last year. There are no figures on the number of capital introduction events, but one investor, Norman Chait, chief executive of Rutherford Asset Management in White Plains, New York, estimates that there are now about 30 a month, nearly double the number of a year ago. William Donaldson, chairman of the securities commission, which has been investigating the hedge-fund industry for more than a year, told the Senate Banking Committee in early April that the agency was looking into these services and the way they are disclosed to investors.
Hedge funds, which typically require a minimum investment of $1 million, are mostly open only to large institutions, like endowments, pension plans and investment companies with at least $5 million in assets, or to individual investors with a net worth of at least $1.5 million or yearly income of at least $200,000 over two years
