Colors of the Season: Green Hedges and Red Tape?

The growth of hedge funds have attracted the interest of government regulators. Although new proposed Fed chairman Bernanke gives them his blessing, many in bureaucratic circles see hedge funds as wild, risky and ripe for government intervention. Hedge Fund managers must be registered with the SEC next February and well-known politicans such as Paul Sarbanes and Elliott Spitzer favor greater regulations. The authors feel that this would be a tragedy: in their view, hedge funds have been a catalyst for market globalization and have served a valuable role in cleaning up market failures. A further complaint is that hedge fund regulation would primarily serve to drive the funds out of the US.

By its nature, hedge funds are no more suited to complex regulation than a 19th century cowboy is to a desk job in a large city. At the same time, clear disclosures of the nature and risk of hedge funds must be provided to prospective investors.