SEC May Conduct Hedge Fund Inspections

The Securities and Exchange Commission will consider making “properly vetted” hedge funds open to retail investors, a step that may require government inspections of the funds, SEC Chairman William Donaldson said Thursday.

Donaldson said SEC inspections of hedge funds may satisfy concerns that these private investment pools for the well-to-do are too risky for lower-income individuals.

“In many ways, you would say a hedge fund has less risk because it is hedged,” Donaldson told reporters after testifying before the House Financial Services Committee’s capital markets subcommittee. Many hedge funds have notched investment gains during recent years of slumping equity markets.

Donaldson’s comments signaled that the SEC would consider an option of imposing inspections on the largely unregulated $600-billion hedge fund industry while making the funds more accessible to retail investors. The SEC has been conducting a yearlong investigation into the estimated 6,000 to 7,000 hedge funds, which in recent years have attracted smaller investors and pension funds seeking higher returns. The number of hedge funds, which can bet on stocks declining as well as rising, has more than doubled in the last five years.