Firm Profile
Ahead, ‘Fast Growing Animal’
What’s Next for The Industry
Why has hedge fund industry come under scrutiny? In a word, money.
Paul Roth, principal, Schulte Roth & Zabel LLP, shares his views on hedge funds from a regulatory standpoint. The firm has about 425 lawyers, a large percentage of whom are employed working for the hedge fund industry, including a London office that is dedicated solely to the hedge fund work.
A continuing series
By Russell Jones, Financial Writer
Paul Roth, partner, Schulte Roth & Zabel, New York, NY."The only limits are, as always, those of vision." – James Broughton
“Schulte Roth & Zabel has 80 lawyers involved on the hedge fund work, plus a very, very large number in addition to that who do M&A work, finance work, and litigation for the hedge fund community,” says Paul Roth, principal, Schulte Roth & Zabel LLP, attorneys in New York City.
Roth says he believes the hedge fund industry is the subject of scrutiny now because it’s enjoyed phenomenal growth.
What you have is an industry that was, let’s say, $60 billion in 1993, $600 billion in 2003, and $1.2 trillion now,” he says. “So anytime you see an industry grow that rapidly, I think you’re going to see it get a lot of attention.”
In addition,” he continues, “if you go back to 1993, there were about 1,100 hedge funds out there, and best guess, today there’s 8,500 to 9,500. So, any way you look at it, assets under management, number of funds out there, there has been an extraordinary explosion of growth, and an extraordinary explosion in the strategies in which they are engaged.”
Roth points to the bubble in 2001 and when the stock market spiraled downward as when “more and more pension and educational groups where looking for something where they could, in down markets, find some positive returns. So, interest in hedge funds has grown substantially among the institutional investors in the last five to six years.”
Add to that the veritable hedge fund problems, such as long-term capital management, which raised the issue of systemic risk, and some other well-known, well-respected hedge funds like Amaranth being liquidated, says Roth, and “you have significant both regulatory interest as well as press interest, and think everybody’s looking around to see what are the implications of this animal that has grown as fast as it has.”
Where is the hedge fund industry headed?
Roth breaks it down into parts. “I think that from a regulatory standpoint, there is an issue of ‘what happens next?’ The SEC’s rule of requiring hedge fund managers to register was thrown out by the CC circuit. I think that there is a bill that was passed by the House of Representatives, at the very end of the session, which required the President’s Working Group to study the hedge fund industry and to report back to Congress ... no such bill was introduced or passed in the Senate. So all we have is this House bill, the so-called ‘Castle’ bill, which is named after Representative Castle [R-Delaware], who proposed it.”
Roth believes that members of the President’s Working Group—which includes the Treasury, the Fed, the SEC, and the CFTC—are actively engaged in figuring out what to do about the issues that they are focused on, which are not the same issues for each agency.
“The chairman of the New York Fed is talking about whether there should be more margin required in the system. The Treasury Department is currently looking into the questions of embedded leverage,” he says. “So between the Fed and the Treasury, they are examining the issues related to systemic risk and how to monitor the amount of leverage in the system, and frankly who should monitor it.”
And what about the SEC? “The SEC continues to be very much concerned about investment protection and fraud,” says Roth. “I think that, in the immediate future, the SEC is trying to work out the investment protection rule to allow investors in hedge funds to sue managers for fraud and also to do something about raising the standards for … investors who can invest in hedge funds.”
He also points to a number of issues being raised in the financial press concerning trading on inside information, especially in the swap market and in the loan market. “I think it is going to be an era of where there is going to be a lot of manning of what’s going on in the industry, in terms of the developments in the industry from a regulatory standpoint.”
From an investment standpoint, Roth believes that the assets under management will continue to grow.
“I think that most of the hedge funds are engaged in doing their bidding on a very, very intelligent and sound basis. And risk control, obviously, is the number-one issue on everybody’s mind in the wake of the Amaranth conviction.”
