Hedge Fund Forum

two major events spur the pot.

Long Term Capital Management was collapsed;

Two Bear Stern Hedge Fund were bankrupt.

Hank Paulson, US Treasury Secretary,  proposed a new loose regulatory scheme for the hedge fund industry yesterday to improve the processes and transparency. Among areas include risk, valuation, disclosure, and fraud.

(Source: Associated Press. Washington. “Paulson unveils hedge fund guidelines–Investor group, advisory panel propose ‘best practices’ for fund managers and investors.” 4.15.08)

use excessive leverage,

go short position,

use derivatives,

trade global currency pairs,

late or pre market trading,

spread rumors on some company,

use the algorithm, and/or API, and/or blackbox trading,

use offshore structures,

130/30,

fund litigations,

…

Long-Term Capital Management (LTCM) had to be bailed out by federal government with helps from other funds as well.

The reason why it was cited in most of the scholarly articles was that the LTCM was manged by two Nobel Laureates in Economics. They were the best of the best, but they might be wrong sometimes, and it got caught up in 1998.

Hedge Fund Regulation Is Not Necessary.

NOTE: HEDGE FUND REGISTRATION: YESTERDAY’S REGULATORY SCHEMES FOR TODAY’S INVESTMENT VEHICLES . BY: Sargon Daniel. 2007 COLUM. BUS. L. REV. 247
“This note argues that a hedge fund registration requirement is inadequate”
“With each suggestion, the least intrusive and most market-oriented approach was presented and advocated”
[no regulation, but self regulation or market-oriented approach]

Article: ON THE DECISION TO REGULATE HEDGE FUNDS: THE SEC’S REGULATORY PHILOSOPHY, STYLE, AND MISSION . BY: Troy A. Paredes. 2006 U. Ill. L. Rev. 975
“nobody knows for sure what motivates a regulator”
“To mitigate the risk of overregulation, the SEC should increasingly consider using default rules instead of mandatory rules.”
“perhaps the SEC can exercise an even lighter touch and simply articulate best practices”
[no regulation, but give guidance]

ARTICLE: HEDGE FUNDS IN CORPORATE GOVERNANCE AND CORPORATE CONTROL . BY: Marcel Kahan & Edward B. Rock. 155 U. Pa. L. Rev. 1021
“But we nevertheless conclude that, at this point, no regulatory intervention is warranted”
[no regulation]

ARTICLE: DR. JONES AND THE RAIDERS OF LOST CAPITAL: HEDGE FUND REGULATION, PART II,A SELF-REGULATION PROPOSAL . BY: By J.W. Verret. 32 Del. J. Corp. L. 799
“In June of 2006, Philip Goldstein and his hedge fund Opportunity Partners L.P. challenged the SEC’s equation of “client” with “investor” in the new regulation.”
“the SEC and banking regulators will burden the nimble traders of the hedge fund world with regulation”
“There is a marked discrepancy between the SEC’s stated goals in SEC Report and their previous registration rule.”
“Any future attempts at hedge fund regulation can be enhanced by the effectiveness of the self-regulatory model.”
[no regulation, but self regulation]

NOTE: LOOKING THROUGH THE HEDGES: HOW THE SEC JUSTIFIED ITS DECISION TO REQUIRE REGISTRATION OF HEDGE FUND ADVISERS . BY: Laura Edwards.

83 Wash. U. L. Q. 603
“In 1998, the infamous hedge fund, Long Term Capital Management (“LTCM”), collapsed, threatening to bring down the entire global economy. n1”
“it is unclear how much information the SEC will receive from the registration proposal, and whether or not the SEC will be able to detect and deter fraud.”
“the dissenting Commissioners can claim logically that the investors will not benefit from having access to more information about the industry.”
[no regulation, but propose two sides working together to come an solution in the future]

Hedge Fund Regulation Is Necessary.

ARTICLE: Protecting Global Financial Market Stability and Integrity: Strengthening SEC Regulation of Hedge Funds . BY: Thomas C. Pearson and Julia Lin Pearson.

33 N.C.J. Int’l L. & Com. Reg. 1
“proposes regulation to provide ordinary investor protection against fraud, to improve market efficiency through increased disclosure by hedge funds, and for other rules of conduct and governance for greater integrity in the market.”
“This article proposes more effective solutions involving a coordinated international approach to hedge fund regulation. The hedge fund regulations proposed in this article aim to achieve a reliably stable financial system, financial market integrity through greater transparency, and protection for all investors from fraud.”
[yes regulation, but enhancing it.]

DEVELOPMENTS IN BANKING AND FINANCIAL LAW: 2005: III. HEDGE FUND INDUSTRY . BY: David I. Silverman. 25 Ann. Rev. Banking & Fin. L. 21
“Hedge fund fraud has become a significant cause of concern for the SEC”
“Recent high profile hedge fund frauds have highlighted the need for greater regulatory involvement.”
[yes regulation]

COMMENT: Hedge Fund Regulation: What the FSA Is Doing Right and Why the SEC Should Follow the FSA’s Lead. By: Lartease Tiffith. 27 NW. J. INT’L L. & BUS. 497
“The SEC is overlooking more important concerns: market risk, liquidity risk, the lack of capital requirements, and excessive economic leverage.”
“how the near collapse of Long-Term Capital Management (“LTCM”) was the first major indication to the U.S. Securities and Exchange Commission (“SEC”) and United Kingdom’s Financial Services Authority (“FSA”) that some type of regulation of hedge funds was needed”
“it made sense that regulators such as the FSA and the SEC provided limited regulation to allow them to flourish”
[yes regulation, but limited guidance]
ARTICLE: UNDERSTANDING HEDGE FUND ADVISER REGULATION. By: Thierry Olivier Desmet. 4 Hastings Bus. L.J. 1
“despite these numerous objections to domestic hedge fund adviser regulation, and before the D.C. Circuit’s fateful ruling, much of the hedge fund industry was at peace with the fact that such regulation was unavoidable and was here to stay”
“After reviewing the matter closely the Commission concluded that hedge funds may pose a threat to investment consumers and to financial stability and attempted to act proactively and responsibly to avoid unnecessary harm to investors.”
“the Commission unanimously adopted a new antifraud rule under the Advisers Act, designed to protect investors in pooled investment vehicles.”
[yes regulation]

RECENT CASE: Administrative Law – Judicial Review of Agency Rulemaking – District of Columbia Circuit Vacates Securities and Exchange Commission’s “Hedge Fund Rule.” – Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006). 120 Harv. L. Rev. 1394

“because of the many forms that these funds take and their incentives to embrace secrecy and avoid regulation, legislation will almost certainly fail to anticipate future trends. Administrative regulation is a viable solution.”
[yes regulation]

Welcome to the Hedge Fund at Harvard. We are organizing an forum in terms of hedge fund regulation.

Is hedge fund regulation necessary?