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Kim Du Toit
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Saturday, May 20, 2006Fed Chief Wary of Regulating Hedge Funds
I came across this article (in of all places the Rocky Mountain News) regarding the new fed chief’s position on the regulation of hedge funds.
Federal Reserve Chairman Ben S. Bernanke, who pledged to continue the policies of his predecessor, is sticking close to Alan Greenspan's opposition to regulation of hedge funds. Bernanke on Tuesday told a hedge-fund conference hosted by the Atlanta Fed that he's skeptical about proposals such as a database of fund holdings that would let authorities monitor risk in the broader financial system. Instead, firms that deal with hedge funds are best equipped to do the job because they have the "best incentives."
The Bloomberg reporters, Craig Torres and Scott Lanman, go on to further note:
His comments may not be the last word on the $1.2 trillion industry because the Fed doesn't have direct jurisdiction over financial markets. That's the responsibility of the Securities and Exchange Commission, whose former chairman, William Donaldson, clashed with Greenspan over a rule to require hedge funds to register with the agency.
I know, not exactly ground-breaking news, but it does reveal the fed chief's position on overall regulation.
Being the SEC has regulatory authority over the hedge fund industry, their historic position of "if it's not broke don’t fix it" will prevail - that is until the next hedge fund scandal causes a political clamor. Then, opportunistic politicians and various other demagogues will bend the SEC to their will and force hedge funds to a level of greater accountability. But I think it will take a financial catastrophe, on the scale of a LTCM, to motivate the Washington and the SEC (wary from the troubles of Sarbanes- Oxley) to increase regulation.
Two other points to consider: 1) would greater regulation of the industry attract even more capital to hedge funds? After all, more traditional asset managers, especially pension funds, would be more willing to have hedge funds manage money on their behalf if the industry had a higher level of transparency. 2) If the industry becomes more regulated, would smaller investors still be shut out?
The potential flood of new money into hedge funds would more than make up for the increased costs of compliance associated with any new regulatory initiative. However, this flood of money would pose an even greater challenge to hedge funds.