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 With increased regulation, the rough and tumble world of hedge fund management will be getting much more tame very shortly. But to what extent managers will be forced to show their hand is still a major question hanging over the head of the industry, according to Kelli Moll, partner at Schulte, Roth & Zabel LLP. The Private Fund Investment Advisers Registration Act of 2009, which is what will most likely be enacted to regulate private asset managers, has two parts, Moll explains to The Deal. The first is the requirement that managers would register as investment advisers with the SEC, which would open them up to periodic inspections. This is an initiative that private fund organizations, such as the Managed Fund Association are backing. (Read more about the MFA in this Dealscape post). The second part is a requirement that hedge funds disclose information that goes far beyond what's previously been asked of the industry. That disclosures would include assets under management, use of leverage (including off-balance sheet leverage), counterparty credit risk exposures, trading and investment positions and trading practices. In addition, funds would have to report any information the SEC determines "necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk." Among the fears is that reporting certain positions or leverage could come out as trade secrets and impede the managers' ability to execute their trade strategy, Moll said. The SEC has said that the information would remain confidential and would only be shared with other regulators. But of course, this cannot be guaranteed. Beyond that, not everyone is in agreement that this would even help mitigate systemic risk. The risk lies with the financial institutions, like the bulge bracket banks, William , professor of finance at Yale School of Management, tells The Deal. "Hedge funds as a vector are second order," and as such, they shouldn't have to disclose their positions, he says. does believe, however, that the information disclosed when hedge fund managers register is helpful, particularly to individual investors, in identifying operational risk. This conclusion he derived from a study he co-authored in 2006 that examined the effects of a short-lived mandate in 2005 that required most funds to register as investment advisers with the SEC. Click here to download the PDF of the study. As it now stands, only some hedge fund advisers are required to register with the SEC. They can be exempt if they have fewer than 15 clients in the past year or don't meet the definition of an investment company. Some managers already register voluntarily. An estimated 1,991 hedge fund advisers as of May are registered with the SEC, according to a report from the Government Accountability Office. - Sara Behunek Listen to Moll discuss regulation in this Intralink Podcast
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