A brief article in the recent press reports that George Soros will convert his $25B hedge fund into a family office to avoid newly enacted SEC regulations affecting hedge fund advisers.  There are reports that many other hedge fund managers are considering following suit.

We must assume that surrendering a $25B business, and returning investor capital, is not a decision lightly undertaken.  Why would a smart guy like Soros do that?

Simply put, under Dodd-Frank the typical exemption from regulation under the Investment Advisers Act enjoyed by hedge fund managers was repealed.  The effect is to require hedge fund managers to register and be regulated.  However, Dodd-Frank mandated an escape clause from regulation for any fund that qualified as a family office.

New SEC rules, effective August 29 of this year, establish a formally defined family office exemption from the effect of Dodd-Frank under the Investment Advisers Act.  (Historically, the SEC would consider exemptions from regulation for family offices on a case by case basis.)  The exemption is not so broad as some commentators had hoped; a family must wholly own and control the office and run money only for “family” as closely defined.  But for families of wealth, the exemption creates a business model that works well enough.  And seemingly, regular hedge fund managers of great personal means, such as Soros, can appreciate the continuation of freedom from regulation that until now they have so profitably enjoyed.

For policy wonks, the SEC adopting release, which explains all this in great detail, is at  the SEC website.

We are left to ponder whether heightened regulation of hedge fund advisers, regulation that drives a successful adviser such as Soros who has created substantial returns to investors over the years, constitutes good policy.  Or does it just satisfy a desire to punish people who are getting “too rich” while many in society are struggling or sinking?  Is this SEC regulation just another facet of a social reaction, another aspect of the dynamic that also seeks a higher income tax treatment for the carried interests of the hedge fund managers?

In the unresolved debate between heightened regulation and the “free marketplace,” Soros’ decision marks the location of one of the minor battles, and it is unclear which side is the winner.