The so-called Dodd-Frank Act signed into law in 2010 created a “hostile” environment for most established hedge funds. Many hedge funds could no longer operate without legislative oversight from the Securities and Exchange Commission (SEC). The Lion Star Fund, a startup hedge fund based out of New York, is looking to sidestep this legislation to operate more fluidly.
The Dodd-Frank Act essentially mandated greater transparency among banks and banking institutions like hedge funds. Prior to the passage of the legislation, hedge funds operated in a “Wild West” of asset management. Major hedge funds, including those operated by George Soros (among others), were forced to become family offices. Family offices are funds that only manage the assets of a certain family or friends and are not subject to as much governmental oversight as standard hedge funds.
The Lion Star Fund, which was borne out of a family fund, has sought greater investment freedom by opting to avoid recruiting US-based clients. The fund is also registered in the British Virgin Islands (BVI), meaning that they are not subject to any SEC regulations mandated by the Dodd-Frank Act. As a condition of their BVI registration, the Lion Star Fund cannot accept clients from within the United States. Any clients inside the United States would continue to be subject to SEC regulations.
The Lion Star Fund garnered press earlier this year for attaining rates of return that were considerably better than other, well-established and publicly-traded funds. Their rates of return were based on statistics from their performance as a family fund. They achieved a 45.4% average realized return during the 8 years of their operation as a family fund (2006 to 2014). They were also able to turn an initial $500,000 investment into over $10 million in assets and capital. The family fund traded and invested in currencies, market indexes, and a wide range of commodities.
Without oversight from the SEC, the Lion Star Fund will be able to operate with a certain amount of freedom. Although hedge fund startups within the United States have increased over the past year, the Lion Star Fund is banking on their immunity from SEC regulations to function successfully and continue producing large returns.
The fund officially opened in 2014 under the helm of Todd Napoli. The fund has heretofore been private about its dealings, but they are looking to attract clients in the upcoming year. It remains to be seen how successful the fund will be, especially considering that they cannot bring in clients from the United States.
The consistent returns that the family office achieved suggest a bright future for the Lion Star Fund, however. The financial climate is still volatile but the fund appears primed to earn solid gains for the rest of 2014 and beyond. They can thank any future success to the fact that they have gotten around stringent SEC regulations.