Washington Post – EIGHT YEARS AGO the collapse of a hedge fund named Long-Term Capital Management triggered fears of international financial instability. Since then, hedge funds have quadrupled thevolume of money they manage and account for perhaps 30 percent of trading on U.S. stock markets. Meanwhile, the regulatory response has been confused. Two years ago the Securities and ExchangeCommission decided, in a controversial 3-to-2 vote, to require hedge fund managers to register and submit to inspections. This policy was opposed by Alan Greenspan, Fed chairman at the time, and gota cool response from regulators at the Treasury Department. In June a federal court vacated it.
Having inherited this mess, SEC Chairman Christopher Cox is pondering how to fix it. His objectives should be to mend fences with his fellow regulators and to tread lightly on this industry. Hedge funds, which exist to come up with futuristic trading strategies that others haven’t tried, are the classic example of an innovative industry with which regulators can’t keep up. Pretending to conduct meaningful oversight is worse than conducting none at all: It dulls investors’ incentives to monitor the risks of putting money into hedge funds.
There are three types of argument in favor of regulating hedge funds, and none is persuasive.
