SEC suspects hedge fund ‘cherry picking’

An SEC official revealed in a recent conference that the agency has uncovered instances of improper conduct in the hedge fund industry

US Securities and Exchange Commission headquarters
The headquarters of the US Securities and Exchange Commission (SEC). The Director of the SEC has said there is evidence as many as 13 hedge funds may have been 'cherry picking' 

Director of the Securities Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations, Andrew Bowden, has spoken out against hedge fund advisors manipulating their performance indicators to better reflect on results. Speaking at a CFA Institute conference, Bowden said the organisation’s quantitative analytics unit had uncovered evidence that as many as 13 funds had been assigning their trades to favoured clients, a practice otherwise known as ‘cherry picking’.

“We plotted the accounts that were allocated winning trades more often than losing trades. And we came out of that and found 13 hedge funds that had accounts that were being disproportionately allocated favourable trades,” he said. However, the agency official went on to stress that the investigation was yet to uncover conclusive evidence of misconduct: “I’m not saying it is a pinpoint but from an examination standpoint we’re zeroing in on issues that raise the spectre of improper conduct.”

The findings come as the SEC closes out a two-year examination of recently registered hedge funds, all of which are managing over $100m in assets and have agreed to comply with the SEC’s regulatory framework, which strictly prohibits cherry picking.

Bowden’s announcement also comes hot on the heels of the regulator’s decision in August to broaden its investigation into how the ‘liquid alternative’ sector operates, after the SEC opted to extend its questioning of 15-20 funds to 35-40 funds.

The agency has, in the last four years, ramped up its efforts to uncover instances of non-compliance amongst fund advisors, and while the investigations have uncovered a long list of deficiencies, many of them are due to the complexity of new regulatory requirements. The 2010 Dodd-Frank overhaul and the SEC’s investigations combined mean that a hedge fund industry that has, historically speaking, been subject to loose touch oversight is now beginning to feel the pinch of sharpened regulatory scrutiny.