Location: New York
Author: Lenny Broytman
Date: Friday, May 25, 2007
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With the current trends surroundings hedge funds becoming a more and more popular topic around the financial sector, many investors have also begun to express concern about the effects hedge-fund blowups could possibly have on various global markets.

An article posted on CNNMoney.com says that many US regulators have been combating the problem by trying to implement measures that would require hedge funds to register as investment advisers but according to Andrew Lo, the problem can be solved much simpler.

Lo, a finance professor at the Sloan School of Management at MIT who also runs AlphaSimplex, an investment management firm based out of Cambridge, says that targeting problem hedge funds is a better and a much more effective solution.

Lo says that the most practical solution would be the inception of an independent agency that would investigate the reasons behind troubled hedge funds, instead of monitoring them all.

CNNMoney.com sat down with Lo to discuss his plans for such an agency.

According to Lo, recent industry pressures to regulate hedge funds haven't been acted on in recent years because of the questionable legality of the rules that have been proposed. One such proposal, an SEC regulation requiring hedge funds to register with the yet-to-be-organized agency, was struck down by a federal appeals court last year.

Lo admits that fully assessing hedge fund risk is not something that is feasible but indirectly measuring systemic risk is definitely within reach.

Lo explained that a government agency that could monitor hedge funds would be a lot cheaper to maintain than a system that would require hedge funds to register somewhere.

Instead of monitoring all hedge funds, the agency would focus primarily on the problem ones. Lo says that he has gotten some positive feedback about his ideas within the industry.

It is important to point out that hedge funds do not generally provide a great deal of transparency because it would be the cause of a loss in intellectual property in the fund. Nevertheless, Lo believes that creating a situation in which an investor can get more information about hedge fund risks while, at the same time, providing complete protection for the intellectual property of the fund manager is very possible.

Lo points out that new forms of regulation are almost inevitable due to the rapid growth of hedge funds.

Ernst & Young Luxembourg partner Christophe Wintgens commented about the future of hedge funds in a March 2005 article posted on his company's website.

"The second wave (for regulation of hedge funds) is due to regulatory developments; the first wave was due more to that fact that pension funds and some other institutions couldn't invest in some offshore domiciled funds and so they had to be moved," noted Wintgens. "And I would say that the attraction of hedge funds has grown as the performance of regular equity funds has been in the doldrums. Some investors wanted these vehicles to be onshore; not offshore."

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Article Printed From RiskCenter.com