May 29, 2006
Do we need to worry about regulation?
I guess we all really need to get a grip on this regulation issue. One time you have just about everyone hankering for regulation, then you have U.S. regulators asserting that there isn't a need for further regulation of hedge funds at this time. And then the European companies get fidgety and are wondering if regulation is a good idea after all.
I think we need to know what makes the Europeans so worried. According to certain European executives, it isn't easy to track what hedge funds are doing, in terms of their investments. And this makes them worried. So what does one European government do to assuage these fears? Last month, the German finance ministry said it would force shareholders to make a regulatory filing when their stake exceeds 3 percent. These disclosure rules are tougher than the 5 percent threshold in the U.S. and are tougher than the 5 percent being proposed for introduction across the European Union in January 2007. Meanwhile, the German Bundesbank has called for self-regulation of hedge funds. It wants industry to create ratings for the risk profile of the various hedge funds.
Meanwhile, in the United States, regulators are still not sure if additional monitoring is necessary for hedge funds. Recently, regulators from the Federal Reserve, Treasury Department, SEC, and Commodity Futures Trading Commission testified before a Senate subcommittee that they needed to better understand hedge funds before prescribing additional regulations.
Probably, these increased calls for regulation stem from the fear that given the large amount of money in the business – around $1.5 trillion world-wide – there is a very high scope of indiscretion and even unethical business practices.
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