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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.

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