In the fall of every year, fantasy football leagues establish playing fields all across the U.S., and even (gasp!) Europe. For the uninitiated, fantasy football is a game played by football fans in which participants draft a team of real NFL players from any of the 32 NFL teams. They then roll out their fantasy team every weekend onto virtual playing fields where points are awarded for touchdowns and total yards gained.
Well, another kind of fantasy football has been played for many years by private equity managers and hedge fund managers. These asset managers have avoided the requirement that they register as investment advisers under the securities and exchange laws and therefore have avoided, for the most part, the scrutiny or examination of the SEC — despite managing enormous sums of money for their clients.
Registered investment advisers in the traditional long-only space have disclosure obligations with respect to their portfolio holdings. Private equity managers do likewise. However, hedge fund managers have long had a competitive advantage over other parts of the asset management industry by being able to look into the portfolios of their competitors without having to reveal their own positions. It is kind of like playing poker, where you get to look at the cards that your opponents are holding before deciding to bet your chips.
But now the Securities and Exchange Commission has taken the important step of proposing rules that would require private equity and hedge fund managers to register as investment advisers. Is this a good thing? Yes. Full stop. No question. It's about time. End of this month's column.