A significant number of US-based hedge funds are planning to exploit a loophole in new Securities and Exchange Commission rules forcing them...

A significant number of US-based hedge funds are planning to exploit a loophole in new Securities and Exchange Commission rules forcing them to register with the regulator by early next year. The SEC's rule only applies to hedge fund advisors that allow investors to redeem their investment within two years of making it. Hedge funds are planning to avoid having to register by extending this period beyond the two years, thus undermining the SEC's attempts to uncover fraud and to get a better understanding of the hedge fund business. Registration with the SEC will require hedge funds managing more than $25 million to submit to periodic audits and provide detailed information about their trading, among other measures, but will only apply to funds that are still open to new business. Hedge funds may be wary of registering with the SEC because an SEC audit will tie up traders and senior management for weeks. They are also concerned that SEC auditors may not understand their complex trading strategies. The cost of complying with the SEC's registration requirement too, may exceed $500,000 for some of the larger funds. The enforced registration has prompted some US hedge funds to close their doors to new investors, thus avoiding the process altogether. One such fund is $7 billion New York-based Atticus Capital which has told investors that it will stop accepting new money on January 1 2006 and will not be registering with the SEC. Atticus also said that if it accepted new investments in the future, it would launch a new class of shares that had two-year lockups that would exclude it from SEC registration.