Institutional Investor's Alpha Magazine - December 2008 / January 2009 - (Page 26)

Hedge Fund Regulation estimates that the $2 trillion managed by hedge funds at the start of 2008 could shrink by as much as 75 percent. Even without such dire predictions, hedge fund managers are staring at the almost certain prospect of increased regulation. “Nearly all ﬁnancial market participants face the likelihood of new or increased regulation,” says Roger Hollingsworth, managing director in charge of government relations for the Managed Funds Association, which represents the hedge fund industry in Washington, and a former senior policy adviser to Connecticut Senator Christopher Dodd. Regulation will take different forms in different parts of the world. In this special report we look at the major regulatory issues facing hedge fund managers in Asia, Europe and the U.S. and the likely outcomes in each region. In a world of increasing uncertainty, change, it seems, is the only sure thing. — Imogen Rose-Smith legislators turn their attention to investor protection and forcing managers to register. And during economic crises, hedge funds become a scapegoat inside the Beltway. Such was the case a decade ago, when John Meriwether and his band of rocket scientists at Long-Term Capital Management nearly brought down the world’s ﬁnancial system with their hugely leveraged bets on more than $100 billion in debt, equity and derivative instruments. The collapse of LTCM — which had to be bailed out in September 1998 by a consortium of Wall Street ﬁrms that agreed to put up $3.5 billion at the behest of the Federal Reserve Bank of New York — led to the ﬁrst major regulatory review of the then-nascent hedge fund industry and its role in the capital markets. Although no direct new regulation resulted, the review laid the groundwork for the Securities and Exchange Commission to approve in 2004 a rule change (later overturned in the courts) that required hedge funds to register. In the current economic crisis, hedge funds have played a fairly minor role. This mess started in the U.S. subprime mortgage market in early 2007 and quickly spread to other areas of the housing sector, eventually engulﬁng almost the entire U.S. ﬁnancial services industry, as the banks that had gorged on high-risk loans were forced to take massive write-offs. For their part, hedge fund managers are quick to point out that it was the near bankruptcy of Bear Stearns Cos., which was bought by JPMorgan Chase & Co. in March in a deal brokered by Treasury Secretary Henry Paulson Jr., and the actual bankruptcy of Lehman Brothers Holdings, which ﬁled for Chapter 11 on September 15, that left the global ﬁnancial system in ruins. However true, none of this may matter. Though hedge funds have not been a big cause of the problem, they undoubtedly will be deeply affected by the solutions coming out of Washington. “The pendulum may swing back toward greater regulation of hedge funds, and capital markets more broadly,” says Sandra Urie, president and CEO of Cambridge Associates, a Boston-based consulting ﬁrm that advises endowments, foundations and other institutional investors on their investments. Urie is also vice chairman of the Investors’ Committee of the President’s Working Group on Financial Markets, which was set up in the wake of the 1987 crash and has been working with regulators and market participants during this crisis to try to restore conﬁdence. Hedge funds continue to be easy to demonize. “And I sense a lot of that coming out of Washington right now,” Urie says. The Usual Suspects With Washington in an uproar over Wall Street’s meltdown, hedge fund managers are already being hauled in for questioning. Registration and more taxation are inevitable; what they fear is everything else. By Imogen Rose-Smith edge fund managers are an easy target — especially in the U.S. When times are good and hedge funds are making mountains of money, Washington lawmakers want them to pay more taxes. When public pension plans start plowing billions into hedge funds, 26 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2008/JANUARY 2009

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2008

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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