Hedge Fund Regulation Driven By Emotion, Conn. Official Says | Stephen Singer
Efforts to regulate the nation's $1 trillion hedge fund industry are being driven by emotion instead of common sense, a Connecticut banking official said Tuesday.
Ralph Lambiase, director of the securities and investment division for the Connecticut Department of Banking, said that many hedge fund failures were caused by fraud, which attracts attention from regulators.
"I don't think that anyone here wants us to impose heavy-handed regulations," Lambiase said, speaking at a forum attended by about 200 hedge fund managers and executives. The forum was sponsored by the state and the Connecticut Hedge Fund Association.
The hedge fund industry has been under renewed scrutiny since last fall's failure of Connecticut-based Amaranth Advisors, which lost $6 billion by wrongly betting that natural gas prices would soar last year.
In December, the Securities and Exchange Commission proposed an anti-fraud rule for hedge funds, making it clear the agency will pursue fund managers for improper activity. Although the SEC lost a federal court ruling last year that would have put hedge funds under its supervision, its narrower changes are not expected to be open to legal challenge.
Hedge funds can invest in anything from commodities to real estate. Some hedge funds buy entire companies; others buy and sell stocks like day traders, but with billions of dollars at stake.
There are more than 9,000 hedge funds in the U.S. They traditionally have catered to the rich, as well as pension funds and university endowments, but increasingly are luring less wealthy investors. Many hedge funds are located in and around southwestern Connecticut.
Jonathan Macey, deputy dean of Yale Law School, said regulators are under strong political pressure to crack down on hedge funds and other types of investments when large scale lawsuits occur.
"The victims are not blamed for their losses. Regulators are," he said. "They're responding to the demands of the polity."
Under SEC rules in effect since 1982, an individual must have at least $1 million in net worth or annual income of $200,000 to qualify to invest in a hedge fund. The SEC has proposed raising minimum requirements so that an individual's assets would have to include at least $2.5 million in investments, excluding a personal residence.
The Bush administration, meanwhile, is pushing for increased vigilance instead of new rules. The President's Working Group, formed after the 1987 stock market crash, last month recommended guidelines they said should be followed by fund investors and institutions such as banks and brokerage houses that do business with the funds.
The guidelines stress the need for more information so investment decisions are based on accurate and timely assessments.
A congressional hearing on hedge funds and the proposed guidelines is expected this spring.
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