Monday, November 17, 2008

Hedge funds: regulations and redemptions

I have to tell you: I'm kind of surprised that last week's news of the Congressional hearings on hedge funds and the financial markets didn't get more attention in the blogosphere and the non-business press.

It sounds a bit funny to say that, as the hearings did secure front page attention from several newspapers (that I happened to see) the following day. This coverage was probably due, in no small part, to the snapshot images of five highly successful and media-shy hedge fund managers being brought before a congressional committee and a bevy of photographers.

Despite this momentous occassion, the hearings did not exactly attract a whirlwind of coverage from bloggers outside the financial sphere, although several business and investing blogs were live-blogging the event. It could be that the weight of this event was lost on bloggers less familiar with the hedge fund industry and the spectacle surrounding some of its prime players.

Still, I have to think that last week's hearings marked an important shift in the hedge fund industry. The push for increased regulation of hedge funds seems to gathering steam here.

In fact, many of the hedge fund managers assembled before the House committee said they supported increased regulations and reporting guidelines, so long as these requirements did not lead to public disclosure of hedge fund positions.

This is an important point, as a hedge fund manager's strategy and the details of his positions may form the core of his business edge, a "secret sauce" not to be divulged to competitors. So I have to wonder: can government regulators be trusted to keep these secrets?

There's also the question of how additional regulation might affect future competition within the hedge fund industry.

Right now, investor redemptions and an ongoing shake-out of existing firms are the immediate concerns for most hedge funds. But what will happen to future entrants in the hedge fund industry if new regulatory demands arise?

Increased regulatory burdens and compliance costs may prevent smaller funds from entering the business, thereby limiting the future competition for larger, more entrenched funds. The costs of regulatory compliance would fall especially hard on small new firms with limited resources. Such costs would effectively serve as a barrier to entry for new funds, while limiting the field for investors and financial entrepreneurs.

This is a crucial point to consider, as even the largest and most successful firms often start life as small and nimble business ventures operating out of a spare room or garage. Just ask Steve Jobs, Henry Ford, or Ken Griffin.

Related articles and posts:

1. Hedge fund hearings: video and notes - Finance Trends Matter.

2. Interview with hearings witness Houman Shadab - All About Alpha.

3. Get Over the Hedge - Forbes.

4. Signs of hope for the hedge fund industry - All About Alpha.

4 comments:

douche trader said...

The simple fact that "our" legislators are incompetent, writing laws to correct problems they never recognized and inherently don't understand (if I’m incorrect in that assumption why does it take the word "crisis" to bring about these new legislations, seriously think about it, I'm not talking about critics but competent legislators), is why I'm convinced they'll only further display their incompetence.

That’s why I don't pay attention, and why it's hard for anyone to pay attention... it's a forgone conclusion that the situation won't improve.

And that's why the markets are fucked and act like shit.

Because everybody knows they're going to fuck everything up. They're loose cannons and they're incompetent!

Nobody can figure out what anything is worth. I swear to god, there are prices there, but nobody knows... mainly because of these clowns. It's funny watching prices all day for the past five years or so... it’s really gotten silly now.

We're up shits creek and the mongoloids rowing the boat are rowing in eight different directions.

We're spinning in circles going up shits creek

Thats why I don't pay attention, and why it's hard for anyone to pay attention... it's a forgone conclusion that the situation won't improve.

And that's why the markets are fucked and act like shit.

Because everybody knows they're going to fuck everything up. They're loose cannons and they're incompetant!

Nobody can figure out what anything is worth. I swear to god, there are prices there, but nobody knows... mainly because of these clowns. It's funny watching prices all day for the past five years or so... its really gotten silly now.

We're up shits creek and the mongoloids rowing the boat are rowing in eight different directions.

We're spinning in circles going up shits creek

Anonymous said...

This is a great post.I will quote from it in my thesis about hedge fund operators. I also learned a lot about hedge fund trading strategies from 2 other great books. Hedge Fund Trading Secrets Revealed..by Robert Dorfman..and Confessions of a Street Addict of course by Jim Cramer..written before he got really famous..both are riveting and very informative. You should check them out if you like reading behind the scenes stuff about hedge fund and what methods they use..….. my winning ratio is now better than ever.

Michael said...

Hey Dave,

did you see this video yet?

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=3906861&cl=10728873&ch=4226720&src=news

David said...

@ DT: I think you're right about a lot of this being a waste of time in some ways.

The congressional hearings are of course, a public spectacle. If they wanted to get to the bottom of what brought on our current financial mess, they would do better to investigate the workings of our monetary system and central bank policies, as well as their own legislation.

@ Mike: Thanks for the Ron Paul clip, didn't catch that one.