Tuesday, December 29, 2009

Regulation of Hedge Funds

Sweeping Changes are Needed if the Regulation of Hedge Funds is to Cure the Ills rather than Mask the Symptoms

The regulation of hedge funds is a vital concern for investors, lawmakers and other stakeholders. The reason for the prominence stems from the growing role of wildcat pools in causing or exacerbating the blowups in the financial forum. The outfits of this breed may take the form of boutique firms calling their own tunes or wildcat groups nestled within larger institutions.

The throng of hedge funds shows a great deal of variety in their trading styles, and market niches. Even so, one common streak is the urge to make a quick profit. As a result, the operators are prone to take on a great deal of risk and often reach beyond the bounds of reason.

Not surprisingly, hedge funds of all stripes go bust in droves whether the economy is surging or slumping. In spite of the breakdowns, however, the true performance of the punters is hidden by the usual statistics of the domain.

Even so, rigorous studies of the field have shown that the investors as a group get a raw deal. To make matters worse, hedge funds in the aggregate pose a serious threat to the economic security of the nation and even the global system of finance and trade. The general public has come to glimpse the enormity of the problem even if the majority happens to be unfamiliar with the details of the hedge fund game.

Until the financial crisis of 2008, the policy of governments around the globe was to stand aloof from the ruckus to the greatest extent possible. To be precise, the standard operating procedure was to wait until a bombshell explodes, then scamper around in order to contain the damage.

Put another way, the policy was to play chicken with the biggest threat in the financial forum. As a result, the upshot has been the recurrent loss of trillions of dollars in assets with each crash in the marketplace.

On a positive note, the financial system as well as the real economy have thus far managed to recover from each debacle within a matter of months or years. In other words, the blowouts battered but did not destroy the global system of finance and trade. Under the current scheme, though, it’s only a matter of time before the whole shebang comes tumbling down.

Given this backdrop, the way forward is clear enough. The only real question is whether there is enough gumption among elected officials to step up to the task and deal with the menace head-on. This article talks about the stumpers at hand and presents a number of wholesome solutions for fixing the problems.

More on Regulation of Hedge Funds.

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