The Limping Bull 4.1

That's basically where the controversy stems from: Hedge Funds not being required to register these activities (other than those allowed to mutual funds) with regulatory bodies (SEC in the US or APRA & ASIC here in Australia).

The problem requires even more attention given that it concerns a rapidly growing industry (over $AU15 Billion in Australia). Critics of the push for more regulation of the Hedge Funds industry claim that these funds attract the most sophisticated investors who understand the different strategies used and require the highest level of competency. This is the "we can regulate ourselves" argument. And they have a point. Working for demanding institutional investors requires greater skill, knowledge, and talent. "Not surprisingly, the incentive-based performance fees tend to attract the most talented investment managers to the hedge fund industry." as Dion Friedland puts it.

So let's say that most hedge funds are, to a different extent, self-regulated. Good news. But we are talking about $US800 billion to $US1 trillion here. So even a few rogue players can do serious damage to themselves (I mean their investors) and the market. In addition, this argument is coming under fire from regulators who claim that more and more small investors turn to hedge funds. In Australia, access to retail investors was facilitated by low minimum investment (down to $AU2,000). The Reserve Bank of Australia also reports that "more flexible investment conditions, a greater number of hedge funds being rated by fund rating agencies and, associated with this, a growing number of funds appearing on the approved product lists of financial planners" all help bringing hedge funds to retails investors. The central bank also counted "increased advertising and promotional activity aimed at retail investors" as determining factors.

My point is: Can we afford to let hedge fund managers decide of what's best practice?

Continues ...