The SEC will clamp down even more on hedge funds during 2013. The SEC’s enforcement division has brought over 100 cases against hedge fund managers since 2010.
The retaliation of hedge funds against the crackdown has made it easier for less sophisticated investors to invest directly in the funds.
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The SEC understands that such activity supports capital formation but it is also concerned that retail focused hedge funds may be offered to so-called accredited investors but that those investors may have little experience or knowledge of the risks involved.
Hedge fund investment opportunities are now available through pension funds, endowments, foundations, and other retirement plans.
Alternative investments are often illiquid and complex. Even though the lack of transparency may be good for business, but the potential for fraud is significant.
Even the most sophisticated investors may become victims of fraud if the fund’s activities are not disclosed.
Smaller funds that have less than $150 million in assets may pose an even greater risk because they are small enough to escape the regulatory eye of the SEC.
The SEC has three units that focus on hedge-fund oversight. The unit on Market Abuse, Structured and New Products, and the Asset Management unit have hired hedge fund managers, private equity analysts, and due diligence professionals to support the SEC in conducting investigations, consult on exams, and assist in policy making.
The temptation for funds to overprice assets to increase compensation has become a common theme in enforcement actions brought to the SEC’s attention.