Witches and Goblins and Hedge Funds, Oh My!

Are hedge funds are too spooky to remain unregulated? That's the growing feeling in Congress and elsewhere, says The Wall Street Journal in today's Review & Outlook column:

“Senate Finance Chairman Charles Grassley is circulating a letter to regulators looking for suggestions on how to regulate hedge funds. He's far from the only one. Connecticut Attorney General Richard Blumenthal is bidding to become the next Eliot Spitzer by doing to hedge funds what New York's AG did to the insurance industry. *** Rumblings can be heard abroad too. The German government wants the G-8 to take up hedge-fund and private-equity regulation. A select committee of the British Parliament is already examining regulations.”

Investment News reports that everybody seems to be getting into the act:

“The Treasury department is leading a task force that is examining the impact of hedge funds on financial markets. The Securities and Exchange Commission, the Federal Reserve and the Commodity Futures Trading Commission are also involved in the inquiry.”

Some Democrats, however, may be soft on hedge-fund regulation. "I don't care if you ride your motorcycle without a helmet," says Rep. Barney Frank. He's expected to head the Financial Services Committee if the Democrats retake the House.

The Wall Street Journal recently asked Michael Steinhardt, the extraordinarily successful hedge-fund pioneer, about regulation. He's agin it:

WSJ.com: So you don't think hedge funds require more government oversight?

Mr. Steinhardt: No, my sense is that regulation will not be constructive in any meaningful way. If you consider the extraordinary expansion of hedge funds to-date, going from a few hundred to estimated 8,000 in a matter of a decade and a half, the number of funds that have created problems, and the number that have been abusive, has been extraordinarily low. If you further say that there is a self-regulatory process here, then hedge funds remain the venue for investors who are, if not sophisticated, at least very wealthy. It seems there are riper areas for regulation than worrying about the free-enterprise choices for wealthy people.

WSJ.com: One concern of regulators is that more and more pension funds are investing in hedge funds, however.

Mr. Steinhardt: There is this broader concern that I acknowledge, but having said that, again, the record to some degree speaks for itself. My sense is that there is clearly no demonstrated need for regulation.

Pension funds and university endowments could be the primary beneficiaries of hedge-fund regulation. High-Net-Worth investors? They'll probably move to greener pastures. On average, hedge fund returns have lagged the S&P of late. And buying a hedge fund doesn't seem so sexy when it's also owned by your brother-in-law's pension fund.

Remember Yogi Berra's oft-quoted remark about a certain restaurant?

"Nobody goes there any more. It's too crowded."

For hedge funds, it may be getting close to Yogi time.

Have a jolly Halloween!