Hedge Fund Hotels and Compliance

The Massachusetts Secretary of the Commonwealth has been investigating hedge fund hotels. Start-up hedge fund managers receive reduced-rent office space in return for send their trading business to the landlord.

UBS AG has agreed to pay $100,000 to settle charges that it failed to disclose the relationship. Galvin charged there was a conflict that harmed investors who did not know the hedge funds were receiving beneficial treatment in return for sending the bulk of their business to UBS.

To me it seems more like a disclosure problem with the hedge funds, receiving reduced rent in exchange for the sending business to UBS. The Massachusetts regulator found fault with UBS for failing to enforce a requirement that its hedge fund hotel clients disclose the arrangements to their investors.

That’s a tough one to swallow from a compliance perspective.