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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at Hedge Fund Roundtable


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

Washington, D.C.
May 14, 2003

Good morning. It truly is a pleasure to welcome all of you to our Hedge Fund Roundtable.

Although I am not surprised, I am pleased to see that we have such a large turnout and I also welcome those of you who are watching by webcast. As you can see by the agenda, we have an impressive group of panelists and a broad range of timely and engaging issues to explore.

As all of you know this is an exciting and dynamic time for the hedge fund industry. Over the past few years, hedge funds have become more popular and continue to grow in size. It is estimated that there are close to 5,700 hedge funds operating in the United States today, managing approximately $600 billion in assets. By contrast, in 1990 only about $50 billion was under management in hedge funds. Hedge funds play an important role in our markets and have a legitimate place in the array of investment options available to investors.

However, while there are frequent reports of high returns for hedge funds, there are reports just as frequently that highlight possible areas of concern, such as potential conflicts of interest, questionable marketing techniques, valuation concerns, and the market impact of hedge fund strategies.

Consequently, since June of last year, SEC staff in the Division of Investment Management and our Office of Compliance Inspections and Examinations have been engaged in a fact-finding mission aimed at reviewing the operations and practices of hedge funds. While we still are at the fact-finding stage, and have yet to reach any conclusions, this Roundtable is the next stage in the process. With our impressive list of panelists, we hope to have a full and frank discussion of many of the issues surrounding hedge funds.

The last time the Commission took a good look at hedge funds was in 1998, when the Connecticut-based hedge fund, Long Term Capital Management, nearly collapsed. After that incident, the Commission, along with the Treasury Department, the Federal Reserve and the Commodity Futures Trading Commission, as part of the President's Working Group on Financial Markets, issued a report on the risk management and transparency issues raised by LTCM in particular and by "highly leveraged institutions" in general. The President's Working Group looked at such issues as firms' adherence to their own stated policies, their margin and collateral requirements, their use of leverage and whether it was excessive, and how well their risk models functioned. The President's Working Group issued a report and recommendations, and indications are that the industry has taken these recommendations to heart.

However, as the markets and the hedge fund industry have continued to evolve, I believe the time has come for us again to review hedge funds and how they are operated, managed and regulated. We are looking to ensure investor protection, and are focusing on issues such as "retailization" of hedge funds, transparency, risk management, conflicts of interest and fraud.

As part of our fact finding to date, SEC staff has obtained and reviewed documents and information from 67 different hedge fund managers representing more than 650 different hedge funds and approximately $162 billion under management. The staff conducted on site visits to a wide range of hedge funds — large and small — and spoke to employees who are responsible for brokerage, compliance, risk management, legal and other operational issues. The staff also met with a variety of industry experts to get their perspective on these issues.

Over the next two days, you will hear from many of these experts, including a host of legal and accounting experts, academics, hedge fund investors, risk managers, prime brokers, representatives from foreign regulators, trade industry representatives, hedge fund consultants and administrators, as well as hedge fund managers and investor advocates. After these two days of discussions, let me assure you that we will continue listening to all of the various perspectives regarding hedge funds. I encourage you to send us your comments reflecting what you have heard today and what you will hear tomorrow because the discussion does not end when we leave here tomorrow.



Modified: 05/14/2003