Most hedge funds aren’t anything like the infamous Long Term Capital Management (LCTM). And, even if most hedge funds were dogs, why is it the business of the government to regulate them? Most investors in hedge funds are well-heeled folk who can afford the risks that come with this volatile investment style, which is designed to generate robust returns by taking big risks. I consider it none of my beeswax if someone makes a million dollars in one of these things or loses his shirt. [Full article]
Source link: http://archive.mises.org/2005/and-the-regulators-propose-regulations/
And the Regulators Propose: Regulations
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Probably the greatest to risk to hedge funds is the government created 2 headed monster, fannie mae and freddie mac. The government enabled ability for these institutions to offer below market rates will probably be the reason of a future hedge fund meltdown. Maybe the government should look at that instead of ‘regulating’ the companies that play by the rules.
The problem is not with the one hedge fund. Fannie and Freddie are part of the problem, but inviting extra players into a rigged system that have guns usually means things won’t end when they go bust.
With LTCM, they somehow managed to lever a trillion of exposure on under $5 Billion in capital, and the cascade could have killed a big bank or two (i.e. too big to fail so have Greenspan come in and liquefy the system).
You have a fiat currency (hardly a market), a financial system playing games (with fannie and freddie above) under fed rules. This part of the risk is socialized (a nice term for systemic risk). They have the moral hazard to lend to hedge funds.
Personally I don’t care either about the hedge funds, but I think it is silly to have a socialistic system for 90% and a “free” market for the other 10%. This breeds things like the S&L crisis (the american taxpayer bailed out that too). Partial deregulation, or socialized risks with individualized rewards doesn’t work.
It breaks my heart that there is no mechanism for introducing any meaningful change in regulatory behavior short of revolution. Mr. Bresiger asks: “So why should the government do anything if a hedge fund implodes? And why should it keep some businesses from failing and ignore the plight of others? Then again, why should major league teams get subsidized by the taxpayers, but the average small business is expected to cut it on its own? And why should there be greater regulation of mutual funds because some are badly run and have high expense ratios?
At one time we thought these excesses could be controlled through political choice…BUT NO MORE!
“And even if most hedge funds were dogs, why is it the business of the government to regulate them?”
Hahaha! Joke’s on you, Mr. Bresiger. The government regulates plenty of things that aren’t its business, including money itself. Regulation is power, and government’s natural inclination, unchecked, is to grow its power and extend its control. Hedge funds are big, rich, invested in by pension plans, and that is enough of an excuse.
But I suspect that a greater motivation may be that hedge funds could be the leading edge of the coming financial instability. In fact, part of the hedge funds’ job is to try to profit from imbalances in the system, the way Soros profited from the crisis in the UK’s currency. These funds, viewed from Central Banks, are wild cannons whose rolling about on the decks could be the catalyst to capsize the financial ship.
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