NEW HEDGE FUND LAW
"A second opinion on a new law," a commentary written by E. Lee Hennessee and Charles J. Gradante, that appeared in your Jan. 6 Others' Views section contained an error in explaining the changes to section 3(c)(1) of the Investment Company Act of 1940, as amended by the National Securities Markets Improvement Act of 1996.
The article stated that the law, as amended, would provide that only a registered investment company would be subject to the "look-through" to its beneficial owners if it owned 10% of more of the outstanding voting securities of a private fund (commonly called a hedge fund).
In fact, the amended law provides that a "look-through" will apply to an investor who owns 10% or more of the outstanding voting securities of a hedge fund, if that investor is a registered investment company or a company that relies on an exclusion from the definition of investment company pursuant to section 3(c)(1) or section 3(c)(7) of the Investment Company Act.
Therefore, this "look-through," and the resulting 10% investment limit that many hedge funds impose on their investors, will continue to apply to the most private investment funds, such as hedge funds and "funds of funds" that invest in hedge funds that rely on section 3(c)(1).
Christopher J. Rupright
Shartsis, Friese & Ginsburg L.L.P.
San Francisco
Finland's pension system
In the May 13 Others' Views section, Mr. James H. Smalhout, in a tragically ignorant way, referred to the credit insurance linked to the Finnish employment pension scheme. The lack of knowledge shown in his commentary warranted an account of the history of the Finnish credit insurance business, which I provided for the Oct. 14 Others' Views section. The express message I wanted to get across was that the arrangement was a measure of Finnish social policy resorted to during the difficult post-war years. In the Dec. 9 issue, Mr. Smalhout responded by calling my reply "a tragically misguided defense."
The reason behind our completely conflicting views is that Mr. Smalhout seems to judge developments in the light of norms applicable to normal commercial insurance practices, thus failing to get my message that the Finnish credit insurance business was not run as a commercial company.
I also explained that the aim of the investments of the employment pension scheme, including the credit insurance provided, was to rescue at least part of the agrarian population that was made redundant in the course of the transformation in society from being lost as emigrants. Mr. Smalhout turned my words around and accused us of having discouraged workers from emigrating to more prosperous countries. Let me clarify that it was our intention to build a country as prosperous as our Western neighbor by promoting industries that are competitive in the international market and by encouraging other business activities, thereby lessening the pressure for emigration.
Mr. Smalhout also argued that it is most unlikely that the workers who might have otherwise emigrated were made better off in Finland. Furthermore, he quotes analysts who believe emigrants actually benefit the countries from which they come. This may hold true for developing countries, but hardly for Finland, which today has a satisfactory ranking among the industrial countries in international statistics, an achievement partly made possible by the successful capital channeling of the employment pension scheme.
Our experience of the "happiness" of emigrants does not support the views of Mr. Smalhout. On the contrary, for a long time they had difficulties adjusting to a different language and culture and would have moved back had there been housing and job opportunities available.
Mr. Smalhout mentions officials at The Central Pension Security Institute and the company Garantia as his sources. The interviews may have been focused merely on the "collapse," not on the historical and structural background, and the persons interviewed may have had a limited understanding of developments, based merely on their own work. Once again, we can only marvel at the validity of the historians' claim that a true understanding of matters is possible only when you know their history.
As Mr. Smalhout insists on talking about the costs of the great collapse, I have no choice but to repeat that the savings to clients in the form of reduced premiums cannot be left out of a total appraisal of costs. Still far more important than any cost benefit calculations is the fact that part of the current basis of the Finnish economy is a result of the investment strategy of the employment pension scheme.
The reorganization of Finnish credit insurance is hardly a consequence of the fall of the Berlin Wall, but rather of conditions of supply and demand on the money market that have been reversed since the post-war years. This reversal called for reappraisal of the situation. In the process, the credit insurance business lost the financial cover provided by the employment pension scheme and was incorporated into a specialist company.
Personally, I am not convinced that this was a good solution. The conditions for granting credit insurance have to be tightened to meet solvency requirements, which will result in a narrower scope for granting credit to small and medium-sized enterprises that are unable to put up adequate securities.
Credit insurance is a dangerous business, a hair's breadth away from not being insurable at all. An insurance business that is limited to the domestic market, more specifically to the field of employment pension insurance, will hardly be helped by the conventional wisdom of risk diversification when, in consequence of their cyclical behavior, capital markets are falling into a deep recession. Under such circumstances, the value of practically all objects will plummet and the bankruptcy risk will rise steeply. This will be the moment of truth for Garantia. I would not bet a penny on the company's survival.
Teivo Pentikainen
The Central Pension Security Institute
Helsinki, Finland
VB Asset Management
In the Sept. 30 issue of Pensions & Investments, you presented the world's 500 largest money managers as established in the P&I/Watson Wyatt World 500 survey. We were sorry to learn the Bayerische Vereinsbank was not on the list.
We would like to provide you with some information on our asset management business.
The Vereinsbank Group counts 55.417 billion deutsche marks (U.S.$36.365 billion) under management as of Sept. 30. Our mutual fund business accounts for 20.857 billion marks (U.S. $13.686 billion); in the institutional sector we manage 18.141 billion marks (U.S. $11.904 billion). The private banking unit manages 6.164 billion marks (U.S.$4.045 billion) and the real estate fund business, 4.415 billion marks (U.S. $2.897 billion).
We have international asset management centers in Austria, Ireland, Luxembourg, Switzerland and New York.
Sophie von Pfetten
VB Asset Management
Bayerishe Vereinsbank AG
Munich, Germany
Independent Fiduciary
This is to alert you that our firm was omitted from your Dec. 9 catalogue of pension investment consulting firms. Set forth below is an overview of our firm.
Independent Fiduciary Services Inc. (formerly Bear Stearns Fiduciary Services Inc.) provides overall development of investment policies/objectives; overall development of appropriate asset allocation; selection of managers for U.S. public and private investments as well as for derivatives and global/international accounts; performance measurement and additional analysis.
We also offer evaluation and selection of custody services; analysis of directed brokerage/commission recapture programs; and development of risk controls for alternative investments.
Our firm has special expertise in the fiduciary aspects of investment decision-making. We specialize in performing one-time evaluative studies of investment programs and practices of public and ERISA funds. We also assist trustees in obtaining fiduciary liability insurance. Finally, our firm acts as an independent fiduciary on specific transactions when needed.
We employ five professional consultants. Although independently owned and not affiliated with any brokerage or investment management firm, we maintain access to the resources and expertise of Bear, Stearns and Co. Inc. and Frank Russell Co. Fees are payable in hard dollars only.
Of the 17 tax-exempt clients on retainer, all are Taft-Hartley funds. During 1996 we performed projects regarding tax-exempt corporate, public and Taft-Hartley funds, ranging in value up to $50 billion.
Samuel W. Halpern
Independent Fiduciary Services Inc.
Washington
Letters to the editor and submissions of commentaries for the Others' Views section may be sent to Barry B. Burr, editorial page editor, by mail to 740 N. Rush St., Chicago, IL 60611 or by e-mail to [email protected] or by fax to (312) 649-5228. Pensions & Investments welcomes contributions and comments.
