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July 31, 2004

Not a Catastrophe for Hedge Funds

By Gregory Bresiger

The hedge fund business will continue to be a growing part of the trading industry. That's even though hedge fund advisers are now subject to a new layer of fund regulation.

"Clearly, it is going to make hedge funds more expensive, but I don't think that is going to hurt the business," says Mark Borrelli, a Chicago-based securities industry attorney who is a former Securities and Exchange Commission official. Borrelli's former employer recently decided to require advisers to register under the Investment Advisor Act.

"Actually, the SEC could have gone further and required a fund to also register as an investment company. So, although no one likes regulation, it could have been much worse. And I think this will have little effect on the business and its expansion," Borrelli says.

The SEC's action requires all hedge funds to adopt basic compliance controls and expand required disclosures to prospective investors, among other things. The SEC will collect information about hedge fund advisers, including the number operating in the United States.

The industry now has assets of some $850 billion, with some predicting it will soon reach $1 trillion.