In This Issue:

• Strike Three for Third Party Marketers - Theo Bakolas
• Obama's Financial Regulation and the Venture Capital Industry - Blake Foster
• SWF's Lead Resurgence in Fund of Funds Interest - Rennee Astphan
• Hot New Fund Mandates

In June, the Obama administration unveiled the long-awaited financial regulatory overhaul plan that is meant to reduce systemic risk in the financial markets. In its current form, the plan states:

“All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold should be required to register with the SEC under the Investment Advisers Act. The advisers should be required to report information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability.”1

By forcing funds to register with the SEC, the administration is hoping to gain a better understanding of the actions these large and often complicated fund managers take and the associated risks.

While some will welcome the change, on the whole, the alternative investment industry has been bracing itself for this impending regulation for several months. And many in the venture capital (VC) sector are fighting against being included in the same overarching reform as hedge fund and private equity fund managers.

The National Venture Capital Association (NVCA) released a statement stating some of the reasons why VC fund managers should not be included in the government’s overhaul:

“The National Venture Capital Association understands the need for these important reforms for investment managers that could pose significant systemic risk to the stability of our financial system. However, we strongly assert that the venture capital industry does not pose such risks and therefore should not be swept into regulation intended for other investment vehicles. The venture capital industry operates in the private market, building companies. It does not utilize leverage on a significant scale nor does it trade stocks or derivatives in the financial markets.”2

Essentially, it is the NVCA’s position that it is unjustified to put VC fund managers in the same risk category as hedge fund managers. VC funds make long-term investments in companies and do not use the complicated and potentially risky investment strategies that hedge fund managers may employ. In addition, the costs and burdens that registration will place on VC firms, especially smaller ones that do not have the capacity to handle the increased costs and staffing requirements of SEC registration, is potentially detrimental to the entire VC industry.

While the proposal is still being revised, it appears that taking a broad brush to a complicated and specific problem may unfairly burden a sector that in reality poses very little risk in comparison to other alternative investment vehicles.

1 Financial Regulatory Reform: A New Foundation, Department of the Treasury, http://online.wsj.com/public/resources/documents/
finregfinal06172009.pdf.
2 Venture Capital Industry Does Not Pose Systemic Risk to Financial Stability, NCVA, http://www.nvca.org/index.php?
option=com_docman&task=doc_download&gid=461&Itemid=93.

Private equity and real estate investments are not new to many sovereign wealth funds (SWFs), but hedge funds are. This year, the Chinese Investment Corporation (CIC) committed $500 million to funds of hedge funds managed by The Blackstone Group and Morgan Stanley. This is an encouraging sign for many funds of hedge funds that have found it difficult to raise capital this year.

It will be interesting to see if CIC’s venture into funds of hedge funds will trigger other Asian SWFs to follow suit. Funds of hedge funds have received a good deal of negative press since the Madoff scandal; many had invested significant amounts of capital in Madoff’s fund. However, large institutional investors typically look to begin their allocations to hedge funds through funds of funds investments because of the diversity offered.

CIC had established a relationship with Blackstone and Morgan Stanley well before this year. Its investment shows its confidence in these firms and in the funds of funds market in general. Coincidentally, the Korea Investment Corporation stated recently that it wants to begin an alternative investment program that will include allocations to hedge funds.

With prominent institutions such as these making assertive investment decisions, BHA analysts believe other Asian SWFs will be encouraged to do the same.

© 2009 Brighton House Associates, LLC. 4 Mount Royal Ave., Suite 140, Marlboro, MA 01752

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