Will Compliance Force Other Hedge Fund Managers to Go Private?

August 1, 2011

This past week, billionaire George Soros announced that he would be returning roughly $1 billion to investors and ending his career as a hedge fund manager for outside investors.

Instead, Soros and his two sons, Robert and Jonathan, have decided to convert the firm into a family office to manage roughly $25 billion in family and foundation money, according to a story from Bloomberg.

Soros cited compliance with the new Dodd-Frank regulations as the reason behind the move. Dodd-Frank requires hedge funds to register with the SEC and reveal information about customers and assets. By converting to a family office, they escape these requirements and are able to maintain their privacy.

“An unfortunate consequence of these new circumstances is that we will no longer be able to manage assets for anyone other than a family client as defined under the regulations,” wrote Soros’ two sons, in a letter to investors.

Soros launched his hedge fund in 1969 with just $4 million of his own savings and money from investors. In those days, hedge funds catered to high net worth individuals and families and no one even tracked the number of funds or their performance.

Soros is well known for his famous $10 billion bet that the Bank of England would devalue to pound, a bet which earned him $1 billion in profits. A well-known “macro” investors who bets on broad economic trends, Soros has been involved in many other notable runs on sovereign currencies.

In 1998, for example, Soros published an essay in the Financial Times advising the Russian government to devalue the ruble. Investors saw that as a sign Soros was shorting the currency, and bet on its decline. The ruble plunged and Russia defaulted on its debt. However, Soros had been buying Russian stocks and bonds, not shorting them, and lost more than $1 billion in that episode.

Nevertheless, hedge funds prospered from 2000 on, as money poured in from pension funds, sovereign wealth funds, endowments and institutions. The financial crisis of 2008 finally put the brakes on hedge fund expansion, wiping more than a quarter of the industry’s estimated $1.9 trillion in assets off the map. That, plus the Madoff scandal, triggered a wave of government regulations and increased investor scrutiny, which is now forcing hedge fund managers to divulge far more information about their practices than before. So the question remains, will more high-profile and successful hedge fund managers follow Soros’ path and go private, too?

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