Hedge Funds- Is There Enough Oversight?
25. Hedge Funds 1: What Is A Hedge Fund?
In a fairly dramatic shift, this July 2006, Security and Exchange Commission (SEC) head Christopher Cox is now asking for increased SEC oversight over the hedge funds industry. He did this in testimony to the U.S. Senate Banking Committee. Cox characterized hedge funds as a risky investment, not appropriate for the average investor. Although hedge fund investors need to invest over $1 million, others invest through pooling smaller amounts of capital thru Funds-of -Funds. This also refers to the ongoing investigation of Pequot Management Capitol, and its former chairman John Mack, concerning charges of insider trading. John Mack was chairman of Pequot for a fairly short time and then went on to become the CEO of Morgan Stanley.
This question of hedge fund oversight has become even more critical with the U.S. Court of Appeals ruling vacating the SECs rule that a majority of hedge fund committee of advisors has to be registered publicly.
The Hedge Fund industry has a value of over $1 trillion, and there are increasing warnings of the danger of overregulation. I guess that means that if you add too much regulation, they will just move 100% of their operations offshore, and the rich investors who invest there will just have to take a flight to the Cayman Islands when they want to do a deal. There is a long standing fear that if a major hedge fund would collapse, the banks that lent to it would collapse too. This is exactly what could have happen in the LTCM Hedge Fund collapse of 1998.
The Washington Post and other hedge fund supporters try to denigrate the argument that hedge funds are centers of insider trading and all sorts of illegal manipulation. Of course, the amount of tax evasion run through the offshore centers that house the hedge fund's main office is mind boggling. If this is globalization, where will cities, states and the Federal Government get the necessary funds for roads, bridges and other infrastructure? So, the whole system is corrupt.
The recent collapse of the Motherrock Hedge Fund and the significant charge against AMRO bank in the Netherlands, warns us that speculation is not risk free. Even though raw materials prices seem to go up indefinitely, when they go the opposite direction that investors think, there will be losses. The idea of hedge funds making money indefinitely by being "market neutral" seems totally utopian, and when the system goes, someone in the Governments and the politicians has to pick up the pieces.