Meme of the day is whether all the current calls for hedge-fund regulation
come not because these funds pose some enormous systemic risk, but rather because
they’re simply not understood.
today has a report from Crestmont Research devoted to "dispelling myths"
about hedge funds – and astonishingly, most of those myths seem to be
negative.
Meanwhile, here in LA, the panel on hedge fund regulation spent very little
time indeed on the question of whether hedge funds did, indeed, need to be regulated.
Of course not, was the consensus: hedge funds are much less risky than any individual
stock, and anybody can buy stocks. Besides, hedge funds aren’t as leveraged
as they used to be back in the bad old days of LTCM, and in any case those prime
brokers (Bear Stearns was mentioned by name) are keeping a very close eye on
their hedge-fund clients and are effectively performing the oversight function
themselves.
It was also noted, fairly enough, that the huge number of hedge funds which
do equity investing pose little if any systemic risk – it’s really only
the credit funds which the likes of Tim Geithner and Jean-Claude
Trichet are worried about.
And the US government seems to be on board with this conclusion – Christopher
Cox, Hank Paulson, and Ben Bernanke
seem to have come to the same conclusion that Bob Rubin,
Alan Greenspan, and Art Levitt came to back in 1999
– that not regulating hedge funds is OK. Of course, no one knows what
the 50 state attorneys general think about such things.
The real problem, according to Mark Lasry of Avenue Capital
Group (assets under management: $13 billion), is that he makes too much money,
and that no one really understands how he does so. Because hedge funds are barred
from advertising, they’re necessarily secretive, and therefore people assume
the worst: when Lasry first set up his fund 10 years ago and told his father
how much money he made that year, his father headed straight to his local synagogue,
on the grounds that anybody making that kind of coin had to be doing something
illegal.
I don’t buy it, myself. Calls for hedge-fund regulation don’t come out of the
politics of envy: they come from people like Geithner who are paid to worry
about systemic risks. It’s true that many, indeed most, hedge funds pose no
systemic risk at all. But that’s not the point. If you knew which funds were
risky, you could cut off the risk right there. The problem is that we don’t.
And that in a world where investors care much more about return than they do
about risk, someone should be worrying and regulating.