Hedge fund managers insist that too much oversight will kill their industry, and deprive investors of the opportunity to make stellar returns. When the market was steadily climbing, no one was inclined to disagree and the hands-off approach prevailed. But the ground is shifting. Securities regulators from around the world are now deep in talks aimed at applying a tighter leash. The idea isn’t popular with the industry, but it’s long overdue.
If there is one critical lesson of this financial meltdown it’s that the markets are more interconnected than ever, and surprises in a handful of large funds can send huge shock waves around the world. It was one thing when hedge funds were tiny, fringe players. Now they represent hundreds of billions of dollars in under-regulated capital with the potential for devastating surprises.
These funds are private businesses, but they are operating in the public markets—just like private car owners operate on public highways. When a driver fails to maintain his car properly or drives too fast, the lives of everyone on the road are potentially at risk. That’s the basis for the whole Motor Vehicle Act, yet for years hedge funds have escaped scrutiny simply by arguing that they are such good drivers they need not follow the same laws as everyone else.
Most hedge fund managers are smart, honest, and worth every penny they make. But this crisis has included far too many surprises, and those painful lessons leave a lasting legacy. The markets work best when transparency is maximized, secrecy minimized, and everyone is playing by the same rules.
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