There are preperation meetings over the weekend for the G8 Summit taking place this summer--and members are discussing proposals to make hedge funds more transparent. In the wake of last year’s big-name losses in private equity – Amaranth’s $6 billion loss grabbed the most headlines – the pressure is mounting for some type of hedge fund regulation.
As the S.E.C. has already said it plans to push through legislation that increases the minimum net worth of a hedge fund investor to $2.5 million from $1 million, some don’t believe regulatory pressures will quell the volatility in private equity. Even if it did, some investors say, it isn’t the government’s place to cherry pick what sectors in the market need more transparency.
Ron Geffner, a former SEC enforcement attorney, believes just that. He debated the issue with Connecticut attorney general, Richard Blumenthal on “Morning Call.”
Blumenthal thinks Congress should pass legislation that will regulate hedge funds, as they have become such a driving force of the market. He points to Amaranth as a perfect example of how hedge funds have become so powerful – and how badly they need regulation. He says transparency rules would do for hedge funds what they have done for other market institutions. Why should hedge funds get preferential treatment? Especially as private equity becomes more alike the overall market, Blumenthal says. Today’s Fortress IPO(the first hedge fund to IPO in the U.S.) illustrates how hedge funds are now a mainstream part of the market and thus should be subject to more scrutiny.
Increased transparency was enacted for mutual funds market timing and stock options trading but made little difference, Geffner says, and it won’t make any difference in how money moves through hedge funds either. While Blumenthal says hedge funds control between 30 and 50% of market trades, Geffner says it’s more like 5%. The SEC’s proposal will reduce the population of potential investors to less than 2% of the entire U.S. population, which is simply too much regulation, according to Geffner.
While transparency rules rarely work perfectly, they are crucial in evening the playing field for investors, Blumenthal says. An editorial published in today’s New York Times makes a similar point, arguing that because of hedge funds’ growing relationships with investment banks, individual investors end up at a disadvantage since they provide less business than the lucrative trades hedge funds make. So the major reason to advance regulation against hedge funds is to protect all the individual investors who simply can’t compete. But whether or not the opaque world of private equity can move to working transparently remains to be seen.
FYI: The Group of Eight (G8) is an international forum for the governments of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. Together, the eight countries represent about 65 percent of the world economy. The group's activities include year-round conferences and policy research, culminating with an annual summit meeting attended by the heads of government of the member states. The European Commission is also represented at the meetings.