Hedge Funds: Bigger Is Better -- And "Cleaner"

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After the Amaranth collapse, many agree that hedge funds could use some guidelines. But regulators -- and some investors -- fear strict rules created at the "emotional level." CNBC's Melissa Lee reports from the World Hedge Fund Forum in Connecticut.

The forum began exactly one week before Rep. Barney Frank (D-Mass.) convenes House hearings on how -- and whether -- to rein in various financial entities. Lee told "Power Lunch" that the forum's members represent not only the funds, but also investors -- so it is far more than just an industry mouthpiece. And the consensus seems clear: both providers and users want to avoid reflexive over-regulation.

Linda Thomsen, the Securities and Exchange Commission's director of enforcement, explained that "those images" -- i.e., scenes of disaster at Enron, WorldCom and Amaranth -- are the stimuli that "catapult legislative action" on financial rulemaking. But Ralph Lambiase, head of the Connecticut Dept. of Banking, believes the real danger lies in "smaller, newer funds" that lack the resources to implement risk-management controls. (70% of hedge funds have less than $100 million under management.) And Lambiase suspects that "valuations are used to cover fraud and misrepresentation" at such smaller entities.

But Lee reports that the record of hedge funds is far "cleaner" than that of publicly traded firms: between 1994 and 2005 losses due to frauds at hedge funds amounted to $6.7 billion; losses at Enron, WorldCom, Tyco International and Global Crossing came to an ugly $435 billion.