Hedge Fund Hotels Under Investigation for Potential Conflicts of Interest

Massachusetts authorities are investigating Wall Street's big investment banks, including UBS, for operating "hedge fund hotels" that provide office space to hedge funds at potentially discounted rates in exchange for lucrative business opportunities. The investigation centers on whether hedge funds are being short-changed by paying higher trading fees that are ultimately borne by their investors. The investigation is in its preliminary stages, and it is unclear whether it will result in enforcement action.

Key Takeaways:

• The investigation is focused on whether hedge funds are being offered discounted rent by banks in exchange for higher trading fees, which would ultimately be paid by investors.
• UBS is one of the biggest operators of hedge fund hotels, leasing 400,000 sq ft of office space to hedge fund managers across the US.
• Bear Stearns, Lehman Brothers, and Goldman Sachs also operate hedge fund hotels, although with smaller operations than UBS.
• The investigation is centered on potential conflicts of interest and fairness to average investors, with Massachusetts Secretary of State William Galvin stating "it's really about fairness to average investors and openness in the financial services industry."
• UBS has cooperated with the secretary of state's request for information, but declined to comment further.

Statistics:

• 400,000 sq ft: The amount of office space UBS leases to hedge fund managers across the US.
• 3: The number of major investment banks operating hedge fund hotels, in addition to UBS.

Sources:

• Stephen Foley in New York
• William Galvin, Massachusetts Secretary of State
• UBS
• Bear Stearns
• Lehman Brothers
• Goldman Sachs