California pulled its controversial proposal to regulate hedge funds after word surfaced that a new law of the kind would inspire hedge funds to move to other states, Investment News reports.

The state's move comes as the Securities and Exchange Commission struggles with its own initiative to up investment thresholds for hedge fund participants. Some investors and hedge fund operators are against a SEC proposal that would increase the wealth requirement for hedge fund investors to $2.5 million in investible assets from the current $1 million in total net worth.

The state rule would have excluded venture capital funds but would have forced hedge funds to register with the state if were not registered with the SEC. California has one of the largest concentrations of hedge funds, outside New York, Connecticut and the Dallas area, according to industry officials.

“We are withdrawing the regulations due to an ongoing parallel process at the federal level which may pre-empt or obviate the need for state action at this time,”

“They've abandoned [the proposal] for now because they believe what is being done by the President's Working Group [on Financial Markets] satisfies their concerns with investment advisers,” said Alicia Lewis, legal counsel for the Managed Funds Association.

While the government is concerned pensions invested in hedge funds are exposed to too much risk, David Friedland, president of both the Hedge Fund Association and Magnum U.S. Investments, said, “The pension fund has a professional investment committee, who are very sophisticated investors. They are responsible for overseeing the investments they make.” He added that “the retail investor, if they're getting exposure [to hedge funds] through a pension, [is] getting a lot less risk than if they relied

Industry participants noted that because California doesn’t require registration now, adding it would eliminate the draw that lures people to set up shop there, instead of in the tri-state area.