Reform fallout vexes small hedge funds

Hedge funds and private equity firms win headlines for their billion-dollar leveraged buyouts and complex trades across borders.

But there are thousands of small funds that worry they’ll suffer from Washington’s effort to rein in the big players.

For small hedge funds, private equity firms and venture capital funds, the key issue is whether they would need to register with the Securities and Exchange Commission (SEC).

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They may not have the wattage of the big bank lobby, but small funds are quietly pressing for help.

“Small funds represent absolutely no systemic risk,” said Mitch Ackles, spokesman for the Hedge Fund Association, a group of primarily small hedge fund managers and investors.

The Obama administration originally proposed that all three types of funds with a “modest” amount of money under management register with the SEC. The House upped that limit to $150 million and exempted venture capital. Senate Banking Committee Chairman Chris Dodd (D-Conn.) dropped the threshold back down to $100 million and carved out venture capital and private equity funds.

On Monday, Sen. Jack Reed (D-R.I.), along with Sens. Sherrod Brown (D-Ohio) and Tim Johnson (D-S.D.), unveiled an amendment to the 1,400-page bill that would set the threshold at $100 million and include all three types of funds. Reed upped the threshold from his original $30 million level.

“I think we want to have a common standard,” Reed said on a conference call with supporters from the AFL-CIO and Service Employees International Union (SEIU). Some critics of hedge funds want much tougher standards on big hedge funds, such as requiring them to pay for the costs of firms that fail in the future.

The rollercoaster debate on the threshold has real implications, small funds say.

Hedge Fund Research, an industry analysis firm, said that roughly a third of hedge funds have $30 million or less in assets under management. Fifty-three percent have $100 million or less under management, and nearly 60 percent have $150 million or less under management.

At a threshold of $250 million for SEC registration, Ackles said, lawmakers would achieve their goal of dealing with big systemic risks to the system.

The Hedge Fund Association has sent letters to lawmakers and met with a few offices, but it doesn’t have a big presence in Washington. The Managed Funds Association (MFA) is the main industry trade group, and represents a cross section of the industry.

The National Association of Small Business Investment Companies (NASBIC) has worked hard on the issue and was pleased when the House Financial Services Committee approved an amendment exempting small business investment companies from the registration requirements. Brett Palmer, head of NASBIC, said the Small Business Administration already regulates those funds. “Double regulation is brutal,” Palmer said.

Small funds say the compliance costs with the new regulations would cut back on their investments and ability to grow. Fund managers pegged the compliance costs at anywhere between $100,000 and $250,000.

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If the threshold were set below $50 million, Fred Russell, managing partner of Virginia Capital Partners, said he would face steep costs.

“For some reason, we would be financially significant to the U.S. financial system, which I find flattering but I think is a bit farfetched,” Russell said on Monday.

The Senate is slated to take up the Reed amendment this week, and the different thresholds would need to be reconciled by the House and Senate.

“We’re going to continue to push to see if we can raise it to $250 million,” Ackles said.