Regulation Could Kill Entrepreneurial Spirit of Hedge Funds: Attorney

Irwin Latner, hedge-fund lawyer and partner at Herrick Feinstein, told CNBC’s “Morning Call” that the risk of over-regulating hedge funds is now greater than the need for more controls.

“I think people underestimate the reasons why hedge funds first came into being,” Latner said Wednesday. “Hedge funds are not mutual funds. They flourish, they provide innovative strategies and styles, they allow new talent to come into the industry… They’re allowed to be entrepreneurial [and] allowed to invest in different instruments.”

There are now some 9,500 hedge funds, with total assets at about $1.4 trillion. The indusry is growing at about 20% per year.

Christian Weller, senior economist at the Center for American Progress, said Congress is simply gathering information to assess the risk posed by hedge funds.

“I think Congress…is holding hearings to gather more information, to figure out how much systemic risk there is,” Weller said. “All the numbers indicate there is growing systemic risk. Hedge funds exist to take advantage of financial arbitrage, to uncover inefficiencies in all kinds of financial markets."

"At the same time hedge funds have grown," he continued, "presumably indicating there is more inefficiency -- the market has become more efficient. We have new technologies, more liquidity. So, there’s a contradiction here. What it ultimately means is that there’s more money chasing fewer opportunities, because of the growth of hedge funds.”

Latner said Congress was welcome to review the hedge fund industry.

“I don’t have any issues with gathering information…as long as it doesn’t compromise proprietary trading strategies,” Latner said. “…I think you have to temper that by the risk. The risk of over-regulation, to me, is much greater than need for any regulation at this point.”