February 02, 2007

Protect Investors or Markets?

-- Pushpa Sathish, Staff Writer

If you have more money, does it follow that you are more financially savvy? That you are well-versed to deal with the vagaries of the hedge fund industry and better prepared to cope if disaster strikes as it did at Amaranth and Long Term Capital Management? Well, the U.S Securities and Exchange Commission (SEC) seemed to think so when it proposed a few months ago that the minimum net worth for potential investors be raised to $2.5 million from $1 million.

But as former SEC chairman William Donaldson puts it, the rule does not address problems such as the rapid growth of the hedge fund industry and the lack of investor knowledge. He hit the nail on the head when he urged regulators over the world to focus on the potential threats to the market instead of regulating who is qualified to invest.

Meanwhile, even as regulators look for ways to bring about transparency in the way hedge funds operate, The Managed Funds, the chief lobbying group for the hedge fund industry, is pushing for the minimum investment rule as an alternative to stricter supervision. A natural reaction – not only do they get more money from richer investors, they also get to keep their MO under wraps.

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I have always taken the view that hedge funds need scrutiny and regulation. It is to the benefit of the consumer that there is full disclosure along the way. Although there are many myths about hedge funds that are not true, like they are full of lofty managers aimed at hurting the economy when if fact they are serving to make it more efficient and stable.

Hedge Funds by name are kind of misleading. I think what needs to happen in American regulation is that we distinguish between what traditionally would be known as hedging, protecting ones capital, and an Investment Fund that takes positions in the markets. It would be nice to have some legislation clarify the difference. They have Investment Funds in Ireland and I think that this is what they should properly be called.

Evan Andersen
Lydia Capital

Posted by: Evan Andersen | Feb 5, 2007 7:43:29 AM

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