Hedge funds face Congress: attacking the dummy

Hedge fund representatives will face Congress this week, another act in a play that will probably end with some bad regulation unless somebody gets some sense.

I’ve been complaining for more than four years about the prospect of hedge fund regulation, including registration requirements. For some samples, see, e.g., here, here and here.  The bottom line is that hedge funds are not our current problem, but may be part of our solution. Hedge fund managers are highly incentivized to exploit current market inefficiencies, including by short-selling and forcing changes in lagging companies. It’s not surprising incumbent managers of target firms and their friends in Congress are unhappy.

Moreover, hedge funds face losing their investors if they lag. That’s why we’re seeing hedge fund liquidations, which may drag the market down. But this is a symptom of the market’s underlying problems, not a cause.

Forcing changes in hedge fund compensation and disclosures that reduce hedge funds’ ability to profit will undermine hedge funds and make markets and firms inefficient, which we can ill afford now. Restricting short-selling has already hurt hedge funds while doing nothing for market efficiency.

All of this is not to say that hedge funds are perfect. But I despair of Congress's ability to appropriately fine-tune the regulation in the midst of a panic.

A lot of the urge to regulate hedge funds now smacks of killing the messenger. Reminds me of a joke I heard long ago. Guy walks into a bar with an arm in a sling. He explained that he was a ventriloquist. He and his dummy had gone into another bar and made fun of the patrons, and this was the result. He concluded, pointing to his arm: “You think this is bad, you should have seen the dummy.”

Comments

[Hedge Fund Lawyer (Bart Mallon)]

It is likely that many hedge fund registration ideas will be thrown around in the near future as congress and other government agencies examine potential registration regimes. One idea is to create a regulatory regime where managers go through a registration process but are then allowed to engage in limited advertising to potential hedge fund investors. As an industry we have to present our ideas to Congress and the SEC if we want to have a say in how the industry should be regulated.

[Hedge Fund Search Digest]

Yes, for the industry, a good opportunity to say its piece. A great example of proactive defense from the industry in the UK, for example, is this open letter ("Hedge Fund Community Albourne Village Rejects Blame"):
http://hedgefundblog.jobsearchdigest.com/178/hedge-fund-community-rejects-blame/