US: Hedge fund scrutiny

Tuesday, May 14

Hedge funds have been operating for roughly three decades. Traditionally, they catered to high net worth individuals, and were thus generally excluded from the financial services regulatory framework.

However, the industry has evolved away from its origins, and now global, multi-strategy hedge funds cater to a variety of institutional investors -- including pension funds.

A committee convened by the President's Working Group on Financial Markets recognises that approximately 8,000 hedge funds currently manage about 2 trillion dollars -- a large pool of lightly regulated capital that poses significant systemic risks.

This has led to calls for a stricter regulatory hand. Yet countervailing trends prevail in the gathering debate over industry regulation:

Clear regulatory impetus

Consensus is building that greater regulation of financial services is necessary, yet the form and details are still being debated. Treasury Secretary Henry Paulson in March unveiled a comprehensive plan to overhaul the regulatory framework for financial services.

Market saviours?

The hedge fund industry as a whole just suffered through its worst-ever first quarter. Yet some leading hedge funds have been wildly successful in currently volatile markets, and others, especially 'vulture funds', are playing a market stabilising role. The industry will marshal these facts as powerful weapons in the fight against legislative intervention.

Hedge funds have demonstrated considerable lobbying influence and are likely to remain effective in making their case on Capital Hill.