Regulating Hedge Funds
A piece from last January that I wanted to remember to file:
No Consensus On Regulating Hedge Funds: By Kara Scannell, Joellen Perry, and Alistair Macdonald: European officials are pushing for more disclosure of hedge-fund portfolios or a ratings system like that for corporate debt. German officials, using their chairmanship of the Group of Eight leading nations this year, are particularly aggressive. But U.S. and British officials are taking a more hands-off approach, advocating additional study and, at least in the U.S., focusing on making sure hedge funds take money only from the wealthy and sophisticated rather than on changing hedge-fund behavior to minimize risks to the global financial system....
There is a nagging worry among many regulators and central banks that hedge funds may pose a significant risk to the global financial system and could precipitate or exacerbate a monetary crisis. They have expressed a desire for a borderless solution.... Today, hedge funds are mainly regulated indirectly through the rules governing the banks and brokerage houses that they trade with and borrow from. In the United Kingdom, hedge-fund managers are required to register with the Financial Services Authority, making them subject to random inspections and examinations....
SEC Chairman Christopher Cox testified in July that "to the maximum extent possible, our actions should be nonintrusive." Timothy Geithner, president of the New York Federal Reserve, has said that it is important to monitor hedge funds but that it isn't desirable to regulate them for now. In Continental Europe, skepticism of hedge funds is greater....
In the U.S. lawmakers have turned their attention away from how funds invest toward who is investing in the funds as a way to protect vulnerable investors. Members of Congress have said they are concerned with pension investments in hedge funds, and the SEC last month proposed a rule that would limit the number of individual investors who qualify to invest in hedge funds by raising the minimum threshold of investment acumen they must meet.
There is the "guard against hedge fund-created systematic risk" point, which is a valid one. There is also the "protect vulnerable investors" point, which seems strangely misdirected: regulating hedge funds ranks perhaps 50th on the liast of steps one ought to take to protect vulnerable investors.
