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Investment banks in US face inquiry into 'hedge fund hotels' by Stephen Foley

Some of Wall Street's biggest investment banks are under investigation for operating "hedge fund hotels", providing office space to hedge funds in the hope of winning lucrative business from them. The bill for trading fees would ultimately be picked up by the hedge funds' investors.

William Galvin, the Massachusetts secretary of state, said he is examining whether hedge funds are being offered a cheap rent by the banks but making up for it by paying the banks higher trading fees. Massachusetts authorities have demanded documents from UBS, which leases 400,000 sq ft of office space to hedge fund managers across the US, amid suspicions that investors may be short-changed.

UBS is one of the biggest operators of hedge fund hotels, which offer a temporary home to fast-growing funds, complete with secretarial and IT support staff. Bear Stearns is another big player, while Lehman Brothers and Goldman Sachs have much smaller operations.

The investigation is at a preliminary stage, Mr Galvin said, and it is too early to say whether it may lead to enforcement action resulting from any findings of securities law violations.