Hedge fund industry can’t monitor itself

The presidential panel that decided there is no need for new hedge fund regulations obviously has incredible faith…

The presidential panel that decided there is no need for new hedge fund regulations obviously has incredible faith the industry can monitor itself.
The President’s Working Group on Financial Markets, which includes the Department of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission and other agencies, thinks that hedge fund companies, their lenders and investors can adequately take care of themselves by adhering to a set of non-binding principles.
Do these people also believe in Santa Claus, the Easter Bunny and the Great Pumpkin?
Other good ideas
Here is another idea that the panel may want to consider: Let’s allow mutual funds to avoid registering with the SEC. After all, the mutual fund industry should be able to adequately take care of itself, right?
Better yet, how about letting prisoners use the buddy system and lock each other into their cells at the end of the day?
All kidding aside, hedge funds have grown at an amazing rate in the United States, and those periodic collapses we all have witnessed have shaken the market and caused many investors to lose a great deal of money. That is why it is imperative that regulators apply pressure and provide greater oversight of hedge funds.
The president’s panel, however, thinks that there is no need for greater government regulation of hedge funds. Instead, it contends that better vigilance is what is needed to ensure that the private pools of capital don’t pose a threat to investors or the financial system.
Ironically, the President’s Working Group on Financial Markets’ report comes in the wake of the failure last September of Amaranth Advisors LLC, a Greenwich, Conn., hedge fund that lost $6.6 billion on natural-gas trades.
Additionally, on the same day the report was made public, a judge in the Federal Bankruptcy Court in Manhattan ordered New York-based Bear Stearns Cos. Inc. to pay $160 million to investors in a hedge fund for doing business with that fund but failing to detect that it actually was a fraud.
Perhaps the panel needs further proof that there really needs to be substantive regulation of hedge funds or of unregistered hedge fund advisers.
The U.S. attorney for the District of Colorado and the Federal Bureau of Investigation recently announced the indictment by a federal grand jury of Joseph Ferona, who reportedly devised a scheme to defraud investors by soliciting them to invest in a hedge fund known as the Global Prosperity Fund. Mr. Ferona, who falsely held himself out to be an investment adviser, never was registered with the state of Colorado or any federal regulatory agencies to conduct financial services business.
Additionally, charges recently were filed by the U.S. attorney for the Southern District of New York and the FBI against former hedge fund manager John Whittier “for carrying out a securities fraud scheme that resulted in losses of about $88 million.”
Protecting average investors
There are about 9,000 hedge funds with an estimated $1.4 trillion in assets. There has been understandable concern in recent years as money from pension funds and other institutional investors has flowed into the hedge fund market in search of better investment yields.
So-called average investors aren’t adequately protected from problems that could arise from hedge fund meltdowns.
Those opposed to the federal government’s conclusion that hedge funds don’t need more regulation accurately point out that more oversight is needed now more than ever, because those funds increasingly manage pension and other retirement money for ordinary investors.
The president’s panel concluded that managers who invest in hedge funds should be diligent.
Although due diligence is a given in this business, so is serious regulation and transparency, which protect investors.