A proposed SEC rule could starve hedge funds of cash by making it nearly impossible to raise money from pension funds. From the magazine Risk:
Pension funds in the US may be unable to invest in hedge funds if a sweeping package of financial reforms by the markets regulator is passed in its current form, warn hedge fund managers and lawyers.
The US Securities and Exchange Commission is proposing a rule that aims to stop private fund managers evading legal liability for actions leading to investment losses. Hedge funds depend on this indemnity to obtain insurance.
The SEC released the proposed rule in February. From the SEC’s press release:
The proposals also would prohibit all private fund advisers from engaging in several activities, including seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity…
Without indemnification, insurance becomes prohibitively expensive or completely unavailable. And without certain types of insurance, institutions including pensions won’t invest in a hedge fund.
This could starve hedge funds of cash. A huge percentage of hedge fund assets come from pension funds.
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An exact count of the percentage of hedge fund assets that come from pensions is difficult to find, given limited disclosure requirements. But investment data company Preqin estimates that 40% of hedge fund assets come from pensions.
Public employee pensions alone invest hundreds of billions of dollars in hedge funds, with even more coming from private company pensions.
If this SEC rule passes in its current form, hedge funds could lose nearly half their assets. It will be difficult to find another source of such huge sums.
You can bet that hedge funds will fight this rule like hell. And with their high priced lobbyists, they may well succeed in killing it.
But if not, hedge funds may be facing some very lean years ahead.
Do you think the SEC will cause a mass exodus from hedge funds? Leave a comment at the bottom and let me know.
Have a wonderful weekend everyone! 👋
More on markets:
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Melvin Capital Faces Investor Revolt
AMC Fails to Deliver Pass 1.3 Million in Latest Report
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Tremendous 
Good. The pension funds didn’t know what they were buying in the first place, hedge funds induced the investment themselves. Get your fat fees and black boxes the hell out of American heroes’ retirement plans. America needs less capital under management, not more.
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Why would funds be put in such jeopardy in the first place? These’s funds are from the working class environment, sustain by the sweat of our brow. How is it possible this fund holds value as a coin does falling in a slot machine pulled from some gambler’s pocket?
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Indemnity affords hedge funds the ability to make irresponsibly risky bets and not be held responsible for the repercussions – while making billions. How can that be considered a fair and free market?
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