The relationship between investment banks who give young hedge funds office space and pay them in "soft dollars" is becoming the latest area of regulatory scrutiny with the State of Massachusetts subpoening UBS in an inquiry. From the New York Times:
Inside a Philip Johnson-designed office tower in Boston’s financial district, UBS, the giant Swiss bank, is running a “hedge fund hotel.”
Like a few other big investment banks, UBS leases space to ambitious young hedge fund traders as a temporary home, complete with receptionists, espresso machines and consultants to help manage their information systems.
In return, the banks hope the hedge fund hotel guests may become big clients.
Some regulators, however, are growing concerned about the relationship between the banks and their hedge fund hotel guests, looking at whether the banks might be using the real estate relationship as a way to entice hedge funds to do business with them, possibly at the expense of their investors.
William F. Galvin, the Massachusetts secretary of state, has subpoenaed UBS and is examining other banks with hedge fund hotels in Boston to determine how they are charging for their services. He is looking at whether hedge funds are paying higher than normal trading fees to banks to compensate them for the office space and failing to disclose this expense to investors.
“It’s a conflict of interest issue,” Mr. Galvin said.
While the state investigation is in a preliminary stage and may not lead to any specific charges, at its heart is a thorny issue that has dogged regulators for decades. Money managers, including mutual funds and hedge funds, often pay Wall Street with “soft dollars” — inflated commissions that include the cost of trading (typically 1 to 2 cents a share) plus an additional few cents a share that can be directed to pay for research and other services.
Soft dollars are controversial because clients pay for the higher commissions, while the services often benefit the manager the most. Higher commissions result in greater expenses for the fund and potentially lower returns for investors.
Banks’ Leases to Hedge Funds Are Questioned – New York Times
