Topic: WSJ: Regulator to examine up to 100 hedge funds starting in the next few months (Read 123 times)

WASHINGTON—The Securities and Exchange Commission is preparing to examine as many as 100 hedge funds focused on cryptocurrencies, according to a person familiar with the matter.

The initiative is separate from the dozens of enforcement investigations already under way, which largely target initial coin offerings, or digital tokens that startups offer in exchange for investments. The SEC has pushed aggressively to police the unregulated world of ICOs, saying that many token deals flout investor-protection laws.

SEC examiners could refer any red flags they observe to enforcement investigators, but the effort is principally being done to inform how the commission’s rules should address the new world of cryptocurrency investments, the person said.
The role of examiners “is to educate the commission overall about new businesses or new industries,” said Marc Elovitz, a partner at Schulte Roth & Zabel LLP who advises hedge funds. “This is a way for the SEC overall to gather information and learn about important new technology and products.”

The effort will start within the next two months, the person said. Examiners are keen to inspect whether fund managers have bought the type of assets they advertised to investors in disclosure documents. Regulators also worry about the risk of crypto assets being stolen because hackers often attempt to breach exchanges where cryptocurrencies are kept.

The SEC will also look at the accuracy of risk disclosures provided to investors, including how the documents explain the fund’s strategy of trading cryptocurrencies or tokens, the person said.

Separately, examiners have also sought information from investment advisers to retail clients about whether they are acquiring digital currencies or tokens for clients. The inquiries are being made during the course of regular exams to get a better sense of the role regulated advisers play in the market, the person said.

The SEC has identified at least 100 private fund managers whose holdings are focused on cryptocurrencies, this person said. The SEC could carry out far fewer than 100 inspections if its examiners find many funds only dabble in cryptocurrencies or they get the information they need from a sample of inspections, the person said.

While hedge funds are most likely to hold cryptocurrencies, the effort could also target private-equity firms if their funds own digital assets directly or through companies that are linked to the fast-growing cryptocurrency industry.

The SEC directly regulates managers of private funds if they oversee at least $150 million in assets in the U.S., but it has the authority to periodically inspect smaller firms as well.

According to Morgan Stanley, hedge funds invested about $2 billion in bitcoin and other cryptocurrencies in 2017. As many as 84 cryptocurrency hedge funds were launched last year.

An index of 24 cryptocurrency hedge funds from data provider HFR Inc. rose almost 3,000% in 2017, far outstripping the 8.7% average return across the global hedge-fund industry. The index is down almost 13% this year.

Some large firms and big-name investors already are involved in bitcoin. Private-equity manager Fortress Investment Group, acquired last year by SoftBank Group Corp. , has ​owned digital currencies that it said last year had a fair market value of $103 million. Horizon Kinetics LLC, a firm that manages more than $6 billion in hedge funds, mutual funds and other products and calls itself “value-oriented and “risk-averse,” has been vocal about its recent purchases of bitcoin and other cryptocurrencies.

Corrections & Amplifications

Michael Arrington, a venture capitalist and founder of technology blog TechCrunch, said the SEC subpoenaed him about an initial coin offering investment he had made. An earlier version of this article incorrectly said the SEC subpoenaed a fund he had established, citing CNBC. (March 22, 2018)

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