December 09, 2006
Hedge Fund Mythbusters
Every time something drastic happens in the hedge fund world and just about everybody hits the panic button of regulation. Why does regulation have to be such a thorn in the side? Why can we just not get done with it and move on with life? Well, if things were that simple in life, we wouldn’t have any hedge funds at all to begin with. So, let’s cut out all this loose talk and try to find out why there is so much opposition to hedge funds.
Fine, I will not go into the exact whys because we’ve done that quite a few times. But what about the reasons cited by opponents of regulation? One of the most cited reasons is that hedge funds are already being indirectly supervised. Don’t get it? Well, look at it this way: Banks are not independent entities and are governed by a stringent set of rules. So the argument goes that since hedge funds have to deal with banks, which are regulated, it means the hedge funds are also regulated… partially. Well, I know it’s a bit of a stretch, but there you have it, the magic word: regulated.
The logic goes that the bank will guard against excesses by their hedge fund clients. They will not be doing this out of the goodness of their hearts (when were banks ever known to be GOOD?). Banks basically need to protect themselves from losses and regulatory problems, SO they will ensure that all dealings with hedge funds are propah.
One problem here though. This reason can be entertained only if bankers are free of conflicts that might impair their judgment. But be honest, can anybody actually sit there and look at a huge honeypot on his desk and not feel the urge to dip a teeny-weeny finger into it? And no, I’m not talking about banks cheating but about them being that wee bit reckless.
In the past few years, the hedge fund market has exploded. There’s just too much money going around and banks have benefited through increasingly larger commissions, fees and trading profits from them. Don’t you think that all this could induce some bankers to err on the side of recklessness? So, where are the naysayers now?
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