Finally the Securities and Exchange Commission (SEC), the US stock market regulator, has succeeded in getting hedge funds under its regulatory ambit. But what is it trying to achieve by doing so?

The recent past has seen hedge funds hog the limelight in the in- vestor community. Many public and private pension funds are rushing to invest in them. Early this year, in the month of January, New York State announced that it might invest a portion of its $88 bn pension fund in the hedge fund. New York State might be followed by other states like Ohio, Texas, Chicago and California. On an average, in the year 2004, one new hedge fund was created every day. Figures provided by Hedge Funds Research reveal that in the year 2004 alone, 400 new hedge funds were created; this pace of growth can be compared to mushrooming of dot.com companies in the dot.com bubble era. According to SEC, as of today there are approximately 7,000 hedge funds, abreast with the number of mutual funds, managing assets worth $870 bn. The main reason for this rapid growth includes hedge funds' ability to earn record returns even when markets are declining and to some extent, the unregulated component. Perhaps, this very feature is attracting investors from all segments. However, with the new regulation in force it appears that the halcyon days for hedge funds have come to an end.

On December 2, 2004, SEC adopted the new rules related to the registration of hedge fund managers under the Investment Advisers Act of 1940. The new rule indicates an amendment to the existing rule, which did not require hedge fund advisers with less than 15 clients to register under the Investment Advisers Act of 1940. But the new rule is framed in such a manner that it brings a large number of hedge fund managers under the SEC purview and forces them to register. With this registration comes a horde of challenges for these hedge fund managers in the form of painstaking compliance requirements and the costs associated with it. In addition, the new regulation requires hedge fund managers to forego their performance fee, which they have been receiving for their extraordinary performance.

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