Mourning the Decline in Hedge Funds (Not)

The demise of a large number of hedge funds will undoubtedly not be mourned by the (regulated) mutual fund industry in general, or the Investment Company Institute in specific.

Over the last couple of years several high ranking executives within the mutual fund industry and at the ICI have pleaded with regulators to establish “a level playing field” to erase the significant advantage hedge funds have in the use of soft dollar brokerage commissions. It seems the mutual fund industry and the ICI feel that, because hedge funds are not regulated investment entities, hedge funds have a significant competitive advantage (over mutual funds) in the use of commissions “paid-up” in excess of the costs of fully negotiated transaction execution.

Apparently the mutual fund industry and the ICI are concerned that hedge funds might use excess commissions paid-up to gain advantage when buying proprietary investment research and other “favors” (first calls, market color reports, trading tips, IPO distribution, client introductions, etc.) in bundled undisclosed brokerage commission arrangements.

Before the explosive growth of unregulated hedge funds (which escalated rapidly coincidental with the end of the dot com bubble, around year 2000) mutual fund advisors had no competition for such brokerage favors. The call for “a level playing field” seems evidence that mutual funds don’t like waiting ‘in the favor line’ behind hedge funds.

I’m sure that as Client Commission Arrangements (CCA’s) concentrate more-and-more power with fewer executing brokers, both registered investment advisors and hedge fund managing partners will find creative uses for undisclosed brokerage commissions. That’s why I believe constructive disclosure and real transparency within bundled institutional brokerage arrangements is the best way to create “a level playing field”.

For more on “A Level Playing Field” see >