Are Hedge Funds and Brokers Too Interlocked? Some Wonder

THE WALL STREET JOURNAL ^ | Thursday, May 15, 2003 | HENNY SENDER and GREGORY ZUCKERMAN

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Last month, Merrill Lynch & Co. hosted three days of meetings for hedge-fund managers and potential investors at the posh Breakers Hotel in Palm Beach, Fla., and picked up the tab for all attendees. The event was part of the matchmaking service that securities firms provide to hedge funds. They do so in the hope that in return for an introduction to potential investors, the hedge funds will give them the first call when it comes to the lucrative business of financing their trading positions and lending them securities, among other services.

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There is a hedge fund in NY that consistently makes 50% annual returns for its clients, net of a 50% incentive fee. Everyone knows that they do it by leaning on sell-side firms for information. The brokers give it up because this hedge fund accounts for 3% of NYSE volume on an average day. They generate more commissions than any other single buy-side firm.

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The regulators want to know if brokerage firms are putting investors in hedge funds in part because these funds use the firms as their broker, rather than because they are the best funds for the investors.

Can regulators really be that clueless. I recall, about 10 years ago, the SEC (or maybe it was the NASD) conducted a study of whether brokers were inclined to direct clients into the proprietary mutual funds---you know, the ones that paid out a higher commission to the producer. Gee, I wonder?

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Name of fund please?

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SAC Capital.