SEC targets hedge funds for 'preferential redemptions'

The Securities and Exchange Commission is investigating whether hedge funds gave favored employees or investors “preferential redemptions” by allowing them to withdraw money while freezing redemptions for other clients, commissioner Elisse Walter told members of the House Financial Services Committee today in Washington. “The huge number of liquidations and suspensions of redemptions by hedge funds in the past year have created particular concern as to whether hedge fund advisers may be favoring their own interests above others and whether principals, employees or favored investors of the hedge fund adviser may have received ‘preferential redemptions’ from the fund at issue,” she testified. Ms. Walter said the regulator has launched dozens of active investigations into hedge funds and is focusing on several other issues, including abusive short selling, valuation concerns with illiquid assets and potential insider trading. The current financial crisis, she said, has also raised the possibility of hedge funds’ offering frauds, where managers use the fact that the hedge fund industry is largely unregulated and non-transparent to conceal Ponzi schemes. “The SEC is also concerned with possible misconduct by funds of funds and feeder funds which invested their own investors’ funds with other hedge fund managers but may have failed to exercise the due diligence and compliance oversight touted to investors regarding such investments,” Ms. Walter added. Despite the scarcity of regulation of hedge funds, the SEC has filed more than 100 suits against such funds in the last five years, primarily by using its anti-fraud authority. In addition, the SEC has continuing investigations into subprime lending and auction rate securities, Ms. Walter said.