Even in an increasingly digital world, the bulk of the country’s hedge funds – private investment groups primarily for wealthy individuals – are still clustered around New York City and its suburbs.
Recently though, some hedge funds have found that an address in Texas can be a useful commodity itself when it comes to finding a favorable judge.
Madlin Mekelburg, legal reporter for Bloomberg, spoke to the Texas Standard about why hedge fund trade groups are coming to the Lone Star State.
This transcript has been edited lightly for clarity:
Texas Standard: You reported that in recent years, Texas has become home to groups related to hedge funds, although not necessarily more hedge funds themselves. What sort of groups are we talking about, and why do they come to Texas?
Madlin Mekelburg: So you got it exactly right. It’s all about that address. The groups we’re talking about are kind of trade associations, a big one being the National Association of Private Fund Managers, and they’re groups that set up shop here in Texas so that they can have access to filing lawsuits in courts in our state.
And we’re looking specifically at federal courts here where they kind of know what they’re going to get from judges. We have some single-judge districts where they can file cases, know exactly who they’re going to get as the jurist deciding their case. And most importantly, when they file an appeal here, it’s going to move up through the conservative Fifth Circuit.
But the address is key, because when you’re bringing a lawsuit, you have to be able to demonstrate that either you live in the area where you’re filing a suit or you do business there. So while exactly as you said, these hedge funds aren’t necessarily moving their business here, their associations, their trade groups, they are.
You know, in real estate, they say location, location, location; in the law, they say venue, venue, venue. It’s the same idea. But why is the Fifth Circuit viewed as an especially advantageous court for hedge fund managers?
So this isn’t a new idea that the Fifth Circuit might be an appealing venue for folks that are looking to challenge federal regulation of any kind. We’ve seen them hand out decisions against the federal government on abortion, on immigration.
Conservative groups have figured this court out. And now Wall Street’s jumping in. And that’s because the Fifth Circuit has become one of the most conservative – and some people would argue, the most conservative – appeals courts in the country.
When Trump was president, he appointed six new judges to the court. So he has the largest share of appointments to the Fifth Circuit. And what we know about those judges is that they trend far more conservative and they also have expressed skepticism about the authority of federal agencies to craft rules and regulations.
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Do you have a case in mind, by any chance, Madlin?
Yes, I do. So the most recent example of this is a decision from the Fifth Circuit earlier this month, actually, where they struck down a rule from the SEC that would have required hedge funds and private equity firms to provide more details about quarterly fees and expenses to investors.
And the Fifth Circuit sided with these industry groups that argued that the SEC overstepped its authority when it wrote that rule. The three-judge panel agreed, and they rolled it back; they’ve blocked enforcement of it. And these groups got exactly what they wanted.
Who is behind this group that you mentioned, the National Association of Private Fund Managers? What’s their story?
That is the $600 billion question actually – and I’ll get back to that number. But the short answer is we don’t really know.
So there are two entities that are confirmed members of this group. And that’s the hedge fund [Millennium] Management and the hedge fund HBK Capital Management. And we only know they’re affiliated from a court filing and one of this group’s many lawsuits that they filed against the SEC.
But outside of that, this group is incredibly secretive. They don’t identify any of their members on their website or in business filings with the state. And I got in touch with a spokesperson who declined to identify anything. All he did was point me to information on their website that says the group represents firms with more than $600 billion in total net assets under management.
We know about Millennium; we know about HBK. I did some quick math, and cumulatively, they have roughly $90 billion of net assets under management. So that leaves us with $510 billion unaccounted for. So I think there’s a lot more to this picture here. And that shows exactly what we don’t know about this group.
