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May 19, 2006 at 08:00 PM
Despite concern from some lawmakers that the lack of transparency and soaring growth of hedge funds pose a risk to financial markets, top regulators shied away from imposing new regulations, instead favoring private sector discipline during a Senate Banking subcommittee hearing May 16.
Susan Wyderko, director of the SEC’s Office of Investor Education and Assistance, said the SEC needs to see the “effects” of the regulator’s hedge fund registration requirement before issuing more rules. “If we were to impose more onerous investment regulations, it may be that we would diminish the utility of those investment vehicles for the investors that invest in them,” she said in her testimony.
Officials from the Federal Reserve and the Treasury Department did outline some inherent risks as the hedge fund market grows to include a wider swathe of the investing public through pension funds after hedge funds’ significant returns.
Randal Quarles, Undersecretary for Domestic Finance, in an effort to quiet some lawmakers’ fears, noted that another hedge fund implosion, such as that of Long-Term Capital management, which roiled the world financial markets in 1998, was unlikely. That’s because there is much more initiative now by counterparties to understand hedge funds and the risks involved, he said. Indeed, Treasury itself will be communicating more with financial market participants to better understand hedge funds over the next several months.
One of the risks Treasury will be focusing on is the “crowded trade” issue, a herding behavior where smaller managers follow bigger ones, which can lead to destabilization if a large number of investment managers are looking to liquidate.
