A measure that would have made Connecticut the first state to regulate hedge funds died in the Senate.
Its unceremonious demise on the Senate calendar came after it won unanimous support in the House earlier in the evening Wednesday, as the Legislature raced toward adjournment.
Rep. Ryan P. Barry, D-Manchester, who co-chairs the Legislature’s Banks Committee, said the bill would have offered protections for private investment funds that have a stake in large hedge funds. It would have required people managing funds with upward of $100 million in assets to disclose any conflicts of interest to their investors.
That disclosure was aimed at preventing hedge funds’ managers from dealing in worthless investments that ultimately would benefit them personally in some way, but not their investors. For example, the manager of a large hedge fund couldn’t quietly deal in worthless investments in a bid to better a company’s profile or bottom line — such as mortgages that are likely to default — without telling clients.
“There’s this regulatory back hole … and these guys end up investing blindly,” Barry said of middle-income workers who may have a stake in a hedge fund as part of a pension system or other complicated investment.
Hedge funds get their name because managers invest, or hedge, bets in risky areas that could prove a big payoff — or not. When they bet on the wrong company, hedges are said to “blow up,” taking investors down with them.
Last year, a similar bill passed the Senate, but died in the House. Some lawmakers representing Fairfield County — which includes Greenwich, which Barry called the “ground zero” of hedge funds — opposed last year’s measure, saying it could drive lucrative businesses from the state. Barry said that more lawmakers got behind the idea after the bill was tweaked to exempt hedge funds that manage $100 million or less. A hedge fund that size might employ perhaps a handful of people.
Now that the bill has failed a second time, however, Barry is pinning his hopes on the U.S. Congress — which actually always was the end game. The failed state legislation specified that if federal lawmakers approved a measure regulating hedge funds, Connecticut’s law would become void.
Before the measure died in the Senate, Barry said that if a huge hedge fund were to “blow up” in Connecticut, taking middle-income workers’ pensions with it, “we don’t want to be asleep at the switch.”
