MA’s Galvin Examines “Hedge Fund Hotel″ Operations by UBS

Massachusetts Secretary of State William Galvin is looking into whether hedge funds have increased their trading fees to compensate banks for office space they lease as a temporary home to hedge fund traders and if the funds are telling investors about the fees.

According to the New York Times, Galvin has already subpoenaed Swiss investment bank UBS – which touts the largest amount of space for these traders. He is also looking into the practices of other banks that run “hedge fund hotels” in Boston to see if they are using the relationships as a way to snag hedge fund business. It is a give-and-take Galvin said he sees as a “conflict of interest,” he told the Times.

“It’s the same soft dollar question,” Galvin told the Times. “What kind of quid pro quo might be in the placement of an order? What’s the relationship between the entities?’

The conflict is over whether hedge funds are paying banks for the space by hiking their commissions for trading. These “soft dollars’ are considered a conflict because investors are paying for services that primarily benefit the money manager, according to the report.

According to the newspaper, Goldman Sachs, Morgan Stanley and Bear Stearns rank at the top of hedge fund business in theUS, but only Bear Stearns runs significant hedge fund hotel operations, with space for rent inNew York,Boston,San FranciscoandLos Angeles.

Bank of America, however, pulled out of the hedge fund hotel business 18 months ago because of the lack of demand, according to the report.