Debate: Holding Hedge Funds To Public Standards

In an earlier post we talked about the issue of hedge fund returns vs. index funds. That's one battle for the massive hedge fund industry--but there's another that's maybe more important: The issue of transparency. Hedge funds might not be publicly traded, but the U.S. Securities and Exchange Commission requires that money managers overseeing more than $100 million--disclose their holdings.

Bulldog Investors’ Phil Goldstein says that’s like forcing Coca-Cola to give away its secret recipe. Why pay a manager to invest your money, he says, when you can just mimic that manager’s stock market plays for free? Goldstein and former SEC prosecutor David Marder debated the issue with Mark Haines on "Morning Call."

Much like a public company, hedge fund managers are required to report financials each quarter – even though they're private. Given the amount of time spent devising strong investment strategies, Goldstein says these disclosures amount to “intellectual theft” authorized by the government. It’d be one thing if the data was collected, kept private and then used for regulation, but it’s not. According to Goldstein, the SEC has said before that it doesn’t even use the data – and it’s made public anyway.

Marder said the reports are a way to rein in a largely unregulated industry. Through them come enforcement actions to prevent insider trading and market manipulation. Also, the SEC gets much-needed information to shape new laws to keep the markets fair. “I’m not sure we want to invest in a world where we don’t feel there’s integrity within the securities markets,” he says.

Remember Long Term Capital Management? Marder says that’s a perfect example of what happens when hedge funds go unregulated.