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News August 7, 2006 Issue

Nearly One in Four SEC-Registered Advisers Runs a Hedge Fund, Report Finds

The Investment Adviser Association and National Regulatory Services have issued their sixth annual "Evolution/Revolution" report on the state of the investment adviser profession. The twenty-page report analyzes industry trends gleaned from IARD data as of April 7, 2006.

The annual Evolution/Revolution reports provide a handy snapshot for year-to-year comparison of IARD data. However, the data in this year’s report was skewed by the registration of more than 1,000 hedge fund advisers. Last year, the total number of registered advisers jumped from 8,614 to 10,290 firms. Of those new registrants, 1,092 firms reported managing at least one hedge fund.

The number of registered advisers — 10,290 — stands in contrast to the mere 6,360 firms that remained registered with the SEC after the "great divide" imposed by the National Securities Markets Improvement Act of 1996. In the years leading up to the SEC’s hedge fund rule, critics of SEC regulation questioned whether the agency’s examination staff would be able to adequately oversee an increased number of registrants. On this note, the Evolution/Revolution report projected that if the SEC’s Office of Compliance Inspections and Examinations maintains its current pace of adviser exams, a complete cycle of routine exams could take more than ten years given the current number of registrants.

The report noted several related trends, in keeping with the higher number of registered firms. For example, the amount of total assets under management by the industry is at an all-time high: $31.4 trillion. That’s up 17 percent from last years’ $26.8 trillion. The report also noted that the number of firms that reported that they had custody also increased.

As a result of the influx of hedge fund managers, as well as the popularity of hedge funds generally, nearly one in four registered advisers reported that it manages at least one hedge fund. Moreover, about one in nine advisers (1,336 firms total) reported that more than 75 percent of their clients are hedge funds.

The report indicates that advisers are paying closer attention to their Form ADV filings. For example, 95 percent of all advisers reported the name of their CCO on their Form ADV Schedule A, as required. In contrast, the 2005 Evolution/Revolution report had found that only 55 percent of all registered advisers had reported a CCO’s name. The report notes that the SEC’s addition of a "completeness check" in this area will ensure that by next year, all ADVs will properly report CCO names.

Similarly, the report noted that only 10 percent of advisers reported no change in the level of their assets under management, down from the 21 percent of firms last year that reported no change. That, said the report, "perhaps indicates that more advisers are taking a closer look at how their [assets under management] are calculated when completing their required SEC filings."

Other longstanding trends continued to be evident: A relatively small number of advisers control a lion’s share of the industry’s assets. Relatively more advisory firms are organized as LLCs; relatively fewer are organized as corporations.

And most advisory firms are small businesses. The report presents a picture of the "typical" advisory firm, with $96 million of assets under management, with six to ten employees and between 26 and 100 clients.