Hedge funds have been under the microscope of U. S. securities regulators for quite some time now, with former Securities and Exchange Commission officials and industry experts warning the managers to be prepared for strict federal regulations, as reported by Svea Herbst-Bayliss from Reuters.

Hedge Funds

Once-secretive hedge funds have been under the radar for a year now regarding the money they manage, the kind of clients they have and how they plan to make money. The hedge managers are hopeful that a part of the requirements under Dodd-Frank financial reform act, to register with the SEC, will be taken back. But experts are of the opinion that the new regulations will not fade, in fact may get tougher.

In late 2012, the EU began demanding firms, which held a short position in European stocks, to disclose the position. The law also requires  firms with a short position equal to or over 0.5% of outstanding shares to publicly list it.

“The election only affirmed Dodd-Frank,” said Mark Calabria, director of financial regulation studies at the CATO Institute, a think tank. “The government can now move from a posture of defense.”

Hedge fund managers now fear a possible “witch hunt” from regulators, who are eager to set a precedent for a sloppy and irresponsible fund, in enforcing the new rules. Managers are also worried over government’s ongoing insider trading probe, which includes prosecutors and federal agents knocking on doors and actually arresting people. About 40 percent of SEC cases involve insider trading.

“Hedge fund managers need to understand that they need to stay ahead of the information that the SEC already has on them,” said David Thelander, a former SEC enforcement lawyer, who is now a managing director at regulatory advisory consulting group Promontory.

Recently, a prominent fund, Steven A. Cohen’s SAC Capital Advisors has been examined on whether it relies on illegally obtained information to gain an edge. Neither Cohen nor SAC have been accused of any wrongdoing.

“The SEC is starting to make surprise visits, they want to make their presence felt,” said Deborah Prutzman, CEO of Regulatory Fundamentals Group, which guides managers on facing these exams.

“They want to string someone up by the yardarm,” Paul Atkins, a former SEC commissioner, who now runs Patomak Global Partners. “I don’t see that happening, though,” he added.

The SEC has been involved in earlier cases regarding market manipulation lodged against short-sellers. The most recent example is the case against Herbalife Ltd. (NYSE:HLF).  In such cases, the SEC has the authority to investigate on a number of different fronts, including whether any outside investors, like hedge fund managers, might have acted improperly by trying to manipulate the company’s stock price by disclosing false or misleading information.