Marketplace Report: Hedge Funds Probed

ALEX CHADWICK, host:

Back now with DAY TO DAY. The Senate Judiciary Committee took up the topic of hedge funds today. These are private investment pools with high rewards and high risks. In most cases, you also need at least $1 million to get into one. But these funds have become more popular with smaller investors, too. MARKETPLACE's Janet Babin is here. Janet, who's in front of the Senate Judiciary Committee today?

JANET BABIN reporting:

Well, the senators have heard from a number of people, but the star witness -so to speak - was Gary Aguirre. He's an attorney who used to work at the Securities and Exchange Commission. When he was at the SEC, he investigated Pequot Capitol Management for insider trading. Pequot is one of the nation's largest hedge funds. But Aguirre was fired last September from the SEC, and today he told the committee that the termination came after he tried to subpoena John Mack - the head of Morgan Stanley - to talk about this alleged insider dealing at Pequot.

Mack hasn't commented, and Pequot last week said the allegations were outrageous, and the SEC denied the allegations as well. But also at today's hearing, Aguirre told the committee that the government really needs to do more to protect people from the risk of fraud from these hedge funds.

CHADWICK: Janet, let us imagine that many listeners are - well, like us -without a million dollars to put into hedge funds. Why do we care about this? Why is this for the kind of people with normal incomes?

BABIN: Yes, that's the thing, Alex. You might think you don't have money in a hedge fund, but you actually could and not even know it. I spoke with Mark Freed about this. He's with Lyster Watson. They manage funds of hedge funds for institutional investors. And Freed says that if you have a labor pension, if you were a teacher, or if you have a government pension or some type of retirement account, it's very possible now that your money is in a hedge fund.

According to the SEC, more than $2 trillion is wrapped up in these funds, and more than size, Freed says hedge funds do a lot of the trading that happens in the world.

Mr. MARK FREED (Lyster Watson): Less than 2 percent of all investable assets in the world are in the form of hedge funds, but they represent a much larger portion of the trading in the world's capital markets because they are traded so actively. And there are estimates as high as 30 percent, for example, of all trading in equities being done by hedge funds.

BABIN: Now last week, a federal appeals court ruled that the SEC couldn't require managers of these funds to register with them, so they couldn't regulate them more than they are right now.

CHADWICK: Well, do they have any control over hedge funds?

BABIN: Well they do, and the industry likes to point this out. Hedge funds are still subject to other SEC reporting rules, and they can't advertise. And obviously, they can't commit fraud, either, and get away with it. That's obviously illegal. So they are still regulated.

Coming up later today on MARKETPLACE, Alex, we're going to look at a new deal happening between the Post Office and UPS. It could change the way we send packages.

CHADWICK: Thank you, Janet. Janet Babin of Public Radio's daily business show, MARKETPLACE, produced by American Public Media.

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