The Presidential Working Group on Hedge Funds Has Been Reading My Blog! Amen.
So the Presidential Working Group on Hedge Funds has spoken - “no” to new regulation, but a stepped-up focus on accredited investor standards, regulated institutions and fiduciaries. I’ve got to say that these are exactly the themes I’ve been writing about since August, and with greater frequency over the past few months. It’s nice to see that my hiatus from Wall Street has not rendered me completely out-of-touch with my former vocation. I am obviously thrilled with their conclusions and recommendations, and believe they are supportive of continued innovation and the further development of the hedge fund business in the U.S.
Some snippets from today’s New York Times article:
********************
Instead, the administration, in an agreement it reached with the independent
regulatory agencies, announced that investors, hedge fund companies and their
lenders could adequately take care of themselves by adhering to a set of
nonbinding principles.The principles, many already being followed by the sharpest investors and
best-run companies, say that investors should not take risks they cannot
tolerate and should carefully evaluate the strategies and management skills of
hedge funds. They also call for funds to make clear and meaningful disclosures
to investors.********************
The working group rejected any proposal that would give the government the
ability to inspect the books and records of hedge funds or force the funds to
make regular reports about their activities. Both banks and brokerage firms must
adhere to stringent rules that give regulators great leeway in supervising
them.********************
“Private pools of capital can be an appropriate investment vehicle for more
sophisticated investors,” read one of the main principles that the officials and
agencies agreed upon. “Because these pools can involve complex, illiquid or
opaque investments and investment strategies that are not fully disclosed, the
risk associated with direct investment in these pools are most appropriately
borne by investors with the sophistication to identify, analyze and bear these
risks.”The report said that the concerns of less sophisticated investors in pension
and retirement vehicles could best be addressed “through sound practices on the
part of the fiduciaries that manage such vehicles.”********************
“Too often, regulators reach immediately for new laws or rules which can have
the unintended consequence of stifling innovation or smothering markets,” Mr.
Green said. “By instead providing principles and guidelines, the President’s
Working Group has recognized the importance of flexibility and efficiency in a
healthy marketplace.”
Amen.
And for your reference, some links to previous posts on the issue of hedge fund regulation:
- 02/12/2006: The G-7 on Hedge Fund Risk: Politics Abound, But Getting the Right Answers
- 01/30/2007: “Implicit” Hedge Fund Regulation: Moving in the Right Direction
- 01/09/2007: Who Says Hedge Funds Aren’t Regulated?
- 10/26/2006: More Mistaken Thoguhts about Hedge Funds - A European Perspective
- 07/27/2006: Do Hedge Funds Give Rise to Externalities?
- 07/16/2006: Much Ado About Nothing - the Hedge Fund Regulation Debate
One of my readers, Mark McQueen, who writes the Wellington Financial blog in Canada, put up a post himself on the results of the task force and the fact that the regulatory environment in Canada appears to be moving in the opposite direction of the U.S.:
This decision, which is against the wishes of the SEC, flies in the face of
the draft rules released earlier
this week in Canada by the Canadian Securities
Administrators. And they appear to be aimed directly at the Canadian hedge
fund community, according to the Globe, and is greatly
influenced by what the Portus fellows
pulled-off:“Portus operated in the exempt market, selling products to wealthy investors,
an area that would be more closely regulated under the new standards. Its
managers would also now have to be registered under the proposed new rules. And
the disclosure of referral fees was a particular concern with Portus, where
investors complained that they hadn’t known their advisers had received large
fees for steering them into Portus products.”
And in the wake of this regulatory dichotomy, Mark asks the following question:
But what about the Canadian office of a U.S.-based hedge fund manager that
taps the Canadian market for limited partner capital? Should Fortress (FIG-NYSE), for example, not be subject to
regulation but a Toronto-based Amaranth II would be?
Good question, Mark. What I will tell you is that fair or not, no U.S.-based hedge fund will be spending much time setting up offices or raising capital in Canada if this would cause them to be ensnared in a web of local regulations. It’s just not worth it. So what will happen? Canada, because of its regulatory regime, will lose out on the innovation and talent fueled by the U.S. hedge fund community. And this would be a shame. But certainly not unusual - Governments enact rules and regulations all the time that have unintended adverse consequences, and this will just be one more to add to the pile (see Continental Europe - their pile is absolutely gigantic!). It remains to be seen whether such regulatory asymmetry will actually come to pass, but if it does, the big loser will be Canadian investors - not U.S. hedge funds. They’ll figure out other places to raise a few bucks.
