Title: In Search of Market Discipline: The Case for Indirect Hedge Fund Regulation
Abstract: Hedge funds are without a doubt important and controversial players in the financial markets. This was originally evidenced by the collapse of Long Term Capital Management, but the subprime mortgage crisis and ensuing hedge fund implosions provided yet another reminder. This is a matter of concern in large part because of the increasing trend of pension funds investing in hedge funds. It is clear that free market restraints have failed to impose adequate market discipline on hedge fund market participants. In addition, direct regulation has proven unlikely and infeasible. Thus, other measures need to be taken in order to establish adequate market discipline. This comment proposes indirectly regulating hedge funds -- placing the regulatory focus on market participants such as pension fund investors and hedge fund creditors. Pursuing this indirect regulatory approach would likely not compel hedge funds to migrate to other jurisdictions (which many argue would be one of the unintended consequences of direct regulation). Thus, this indirect regulatory approach would preserve the many benefits hedge funds provide, while still minimizing systemic risk through increased disclosure. Specifically, this comment proposes: (1) amending ERISA to provide that any private pension fund that seeks to invest money into a hedge fund may only do so if that hedge fund discloses certain material information and is registered with the SEC; (2) that Congress should enact new legislation that would allow hedge funds to voluntarily register with the SEC as hedge funds, to provide an avenue for hedge funds to, at a minimum, provide the SEC with audited financials, follow SEC rules in calculating the value of their assets, and disclose their trading strategies in confidence;and (3) developing an international regulatory solution to address the arduous task of uniformly regulating hedge fund creditors.
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
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Cited By Count: 1
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