SEC to electronically monitor hedge funds

In the wake of the Madoff scandal and fears that investors could fall victim to similar Ponzi schemes, the US Securities and Exchange Commission plans to implement a sophisticated electronic monitoring system that will allow it to keep closer tabs on hedge funds and other alternative investments.

The SEC plans to award a contract for the system to financial research firm Morningstar, according to government documents obtained by InformationWeek. The deal would call for Morningstar to provide SEC personnel with access to its Web-based Altvest database, which tracks trading activity across more than 8,000 hedge funds.

The SEC intends to award the contract to Morningstar on what's known in government outsourcing circles as a sole-source basis. That is, the agency won't actively solicit bids from other vendors.

"Morningstar is the only vendor capable of delivering the data from the Altvest database in the format that is required by the commission," the SEC stated.

Although hedge funds aren't required to register specific holdings with the SEC, the agency has been heavily criticized for its failure to spot the Madoff scheme and for ignoring warnings from concerned investors.

The day before the SEC documented its intent to implement Altvest, former money manager Harry Markopolos told congressional investigators that the agency lacked the sophistication to catch Madoff-style scammers. "The SEC securities lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed," Markopolos said, according to an account of the hearings published in The Financial Times.

Altvest could give the agency's lawyers and forensic accountants a better shot at identifying would-be Madoffs. "The sole-source contract is for an Internet-based service that provides access to detailed information on hedge funds," the SEC's documentation states.

Among other things, the software provides daily updates on hedge fund activity, offers more than 100 analytical charts, performs customizable scenario analysis, and tracks more than 300 searchable portfolio data points.

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